Federal Labor says Scott Morrison's economic credentials are "shredded" as the Prime Minister sought to play down the economic and political impact of the first election campaign interest rate rise hike in 15 years.
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The official cash rate has been raised by the Reserve Bank Board by 0.25 percentage points to be 0.35 per cent. The RBA Board expects headline inflation of about 6 per cent for 2022 and underlying inflation of around 4.75 per cent, dropping to about 3 per cent by 2024.
The Morrison government has moved in response with a new cost of living measure for pensioners: freeing up income by freezing the current level of deeming rates. The lower rate was reduced to 0.25 percent during the pandemic.
The last mid-election hike came in 2007, when then-Prime Minister John Howard's promise to keep interest rates low was undermined and he lost government and his own seat.
But Mr Morrison stopped short of following Mr Howard in apologising for the rate rise.
"I sympathise with Australians when they face higher repayments on their homes, of course I do. That's why we've provided the relief in the budget," he said, gripping the lectern.
It is the first rate rise since November 2010. Further rate rises are expected throughout the rest of the year with economists expecting three more rate rises this year and more in 2023.
Reserve Bank governor Philip Lowe said it is now time to begin withdrawing some of the extraordinary monetary support put in place to help the Australian economy during the pandemic.
"These forecasts are based on an assumption of further increases in interest rates," Reserve Bank governor Philip Lowe said.
"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up.
"Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."
Highly indebted borrowers, particularly those with home loans, will be impacted by the rise from a record low of basically zero, at 0.1 per cent. Official rates were slashed in 2020 as an emergency response to the pandemic.
The move is designed to curb surging inflation, which is running at an annual rate of 5.1 per cent.
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The Prime Minister, backed by Treasurer Josh Frydenberg, blamed the spike on a series of international crises - the COVID-19 pandemic, the war in Ukraine - which he warned would continue.
But he insisted the government's economic "shield", including one-off payments to ease cost of living pressures, had protected Australia from the worst impact of global crises.
Asked if this "shield was shattering," he responded: "Absolutely not".
He insisted the rate rise was in fact proof of Australia's economic recovery.
"Of course, for those who will be paying more, that will be harder and we understand that," Mr Morrison said.
The government has moved quickly to introduce a new cost of living measure for pensioners to ensure payments are not reduced as earnings increase from deposit accounts.
A re-elected Morrison government will announce on Wednesday it will guarantee the deeming rates used to determine the income earned from financial assets will be frozen at the current record low for the next two years.
The government said 450,000 age pensioners and 440,000 other welfare recipients would have greater certainty around their fortnightly payments.
"This is another shield to help protect Australians from the cost of living pressures people could feel from an increase in interest rates," the Prime Minister said in a statement.
Labor's treasury spokesman Jim Chalmers said the rate rise has happened on Mr Morrison's watch and he must take responsibility.
"Scott Morrison's economic credibility was already tattered and now it is completely shredded," he said.
But Dr Chalmers insists he is not questioning the independence of the RBA or that there are global events at play. He said Labor has been "responsible and reasonable" about the causes of these interest rate rises.
"The issue that we have with Scott Morrison is not that he doesn't take responsibility for every aspect of this," he told reporters in Canberra.
"It's that he takes responsibility for none of this whatsoever. And when things are going well is in front of the camera claiming all the credit. When times are tough. It takes none of the responsibility."
The unemployment rate, which is at 4 per cent, is expected to decline to about 3.5 per cent by early 2023 and remain around this level, according to the RBA board.
Eventually, the RBA governor said interest rates will return to about 2.5 per cent.
"It's not unreasonable to expect that the normalisation of interest rates over the period ahead could see interest rates rise to 2.5 per cent," he said.
"That would be a more normal level of interest rates and how fast we get there and whether we get there is going to be determined by events."
Pressed on whether Tuesday's rise would lead to the same electoral defeat as Mr Howard's in 2007, Mr Morrison replied: "Of course not".
He stressed the RBA had flagged evidence of wage growth and stable unemployment.
"These are the things that Australians want to see in their economy. They want to see growth. They want to see jobs. The want to see improvements in wages that the Reserve Bank governor himself is now saying is occurring," he said.