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With inflation soaring to a 21-year high, a pre-election hike in interest rates could now well be on the cards, experts say.

If Australia’s Reserve Bank raises the official cash rate next week, Scott Morrison will become the first prime minister to face an interest rate rise during an election since John Howard in 2007.

Mr Howard went on to lose his own seat of Bennelong and the top job.

Inflation is now at 5.1 percent, its highest level since since 2001, when the Goods and Services Tax was introduced.

Combined with export demand and higher fuel costs, food prices have been heading north at a faster rate than inflation.
Combined with export demand and higher fuel costs, food prices have been heading north at a faster rate than inflation. (9News)

Australia Institute chief economist Richard Dennis told Today inflationary pressures meant the chances of the Reserve Bank making the move at their next meeting was now about 50-50.

“They are going to increase interest rates, they are going to do it. Whether they do it at the next meeting or the meeting straight after the election, you know, it is as much to do with politics, really, as it is to do with economics,” Mr Dennis said.

“One of the Reserve Bank’s main job is to control inflation, to control the cost of living, and what we have just seen is inflation at 5.1 percent, and that’s twice what wages are growing at. 

“So, real wages in Australia now are falling, because prices are going up so much faster than wages.” 

Gary Mortimer from the Australian Business School said Australians had been hit hard at the supermarket check-out with the price of some groceries rising at an even faster pace than the overall inflation rate.

“We have seen the price of fruit and vegetables increase higher than the 5.1 percent reported as the general inflation rate. 

“The other area we have seen is beef prices and lamb prices. They are skyrocketing. 

“We had the SPC chairman come out and say continued fruit and veg and baked beans possibly going up 10 to 20 percent.”

Mr Dennis said the government’s stimulus policies during the COVID-19 pandemic and into the election year had led to inflation increasing at a faster than normal pace.

Australia's property market is expected to hit a sharp downturn as interest rates increase.
Australia’s property market is expected to hit a sharp downturn as interest rates increase. (Supplied)

While the extra stimulation to the economy was necessary, some actions, such as paying millions in JobKeeper to retail giant Harvey Norman had failed to have the desired impact, Mr Dennis said.  

“What’s happened is we poured a lot of money into the economy during the crisis, that was good, but because of the way the money was spent it hasn’t set us up to come out stronger and better.

“Now, we are seeing inflation rise faster than people expected, and that means the Reserve Bank are going to have to pull on the brake probably harder and faster than they expected.”

Source: 9News

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