Australia hikes interest rates to rein in inflation

SYDNEY — Australia's central bank raised interest rates more than expected on Tuesday and warned of more increases as officials try to rein in "significantly" high inflation.

Governor Philip Lowe said the Reserve Bank's main lending rate would go up half a percentage point to 0.85 per cent, surprising analysts who had tipped a quarter point lift.

He also said "extraordinary" support for the economy via low rates would continue to be unwound.

The move comes as inflation has seen the price of lettuce increase 300 per cent and sent already sky-high house prices in major cities soaring by a quarter since the start of the pandemic.

"While inflation is lower than in most other advanced economies, it is higher than earlier expected," Lowe said.

"Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation," he added, while warning that "domestic factors are playing a role, too".

The governor cited a tight labour market and widespread floods as local reasons helping inflation rise to 5.1 per cent.

The pandemic forced Australia's economy into its first recession in a generation, and the recovery has been patchy.

Rate rises hit hard in a country where debt levels from pricey mortgages are particularly high.

Lowe said the bank would be looking closely to see if that dual shock causes consumption to decrease more than expected.

He also warned that there were concerns about the global outlook, with Russia's war in Ukraine pushing energy and agricultural prices higher.

"There are also ongoing uncertainties related to COVID, especially in China," the bank said.