RBA raises cash rate to 4.60% as fuel costs complicate inflation fight

The Reserve Bank of Australia raised its cash rate target by 25 basis points to 4.60% on Tuesday, saying higher energy prices and other inflation pressures warranted another increase despite signs that the economy is slowing. The unanimous decision was the bank’s fourth rate rise this year. It raises borrowing costs at a time when households are also facing higher fuel prices.

In its policy statement, the RBA said the Middle East conflict had broadened and global energy prices were much higher than it had assumed in its August forecasts. Further disruption to global oil supplies was maintaining pressure on Australian energy prices, it said, while higher fuel costs had already been partly passed through to other goods and services. The bank also cited domestic capacity pressures and rising global prices for technology goods linked to demand for artificial intelligence.

Why the bank raised rates again

The RBA said firms were reporting higher costs and were either increasing prices or considering doing so. Short-term measures of inflation expectations remained elevated, and recent inflation outcomes had been stronger than the board expected at its previous meeting. In the bank’s assessment, the three earlier rate increases this year had tightened financial conditions and the economy appeared to be slowing, but inflation remained too high to leave policy unchanged.

The latest Australian Bureau of Statistics figures available in the supplied releases cover July. Annual consumer price inflation was 3.5%, down from 3.8% in June, while trimmed-mean inflation was unchanged at 3.6%. Both measures were above the RBA’s 2–3% target range. Those July figures provide context for the decision, but they do not measure the full effect of the latest rate rise or establish where inflation will go next.

The trade-off for households and jobs

Higher interest rates are intended to restrain spending and investment. Commonwealth Bank economist Belinda Allen told ABC News that more expensive borrowing and more attractive saving tend to reduce demand pressure over time. The immediate effect varies across households: people with variable-rate mortgages are exposed to changes in lender rates, while savings rates may also rise. How much of the RBA’s increase lenders pass on depends on their decisions.

ABC News calculated that a 25-basis-point increase would add roughly A$91 a month to repayments on a A$600,000 variable-rate mortgage with 25 years remaining. It estimated that this year’s four increases together would add about A$360 a month for a borrower with that loan. These are illustrations, not a repayment figure for every household; the amount depends on the loan and the rate charged by its lender.

The RBA acknowledged evidence of weaker activity. It said consumer spending was gradually easing, housing prices had fallen in most capital cities and new housing loans had declined noticeably. Labour-market conditions had eased broadly as expected, although leading indicators were broadly stable. Output growth had slowed but was somewhat stronger than the bank expected in the June quarter, while business investment and debt growth remained strong.

Bullock said unemployment was 4.6% and ‘still quite low historically’, The Guardian reported. She described the bank’s aim as returning inflation to target while retaining as many post-pandemic employment gains as possible. The tension is that restraining demand can help reduce inflation while also putting pressure on growth and jobs. The RBA said prolonged uncertainty could leave activity lower and inflation higher than forecast; it presented those as risks, not outcomes.

What comes next

The board said it could increase the cash rate further if needed and would use incoming data and its assessment of the outlook to guide future decisions. That leaves another rise possible, not decided. The Guardian reported that some economists expected a further increase at the next meeting, while ABC News reported that several major banks expected the RBA to stop raising rates for the rest of the year. Those forecasts differ, and neither is a commitment by the board.

The immediate question is whether higher energy and transport costs continue to spread into other prices while spending and employment soften. The RBA said it wants aggregate demand to remain subdued long enough to ease capacity pressure and return inflation sustainably to target. Its September statement establishes the reason for this increase, but the eventual effect on inflation, growth and jobs will depend on data that have yet to arrive.