Reserve Bank of Australia raises cash rate to 4.60% as inflation risks grow

The Reserve Bank of Australia raised its cash rate target by a quarter of a percentage point to 4.60% on Tuesday, increasing borrowing costs as it tries to contain inflation. The 29 September decision was unanimous. It was the fourth increase this year and took the rate to its highest level since 2011.

The bank said recent inflation and economic activity had been stronger than it expected at its previous meeting. It also pointed to higher global energy prices after the Middle East conflict broadened. Its warning that it could raise rates again was conditional: the board said incoming data and its assessment of the outlook and risks would guide future decisions.

Why the board raised rates

In its policy statement, the board said some inflation risks it identified in August were materialising. Global energy prices were now much higher than assumed in its August forecasts, while AI-related demand was pushing up prices for technology goods. The bank also cited pressure on Australia’s domestic capacity and said firms it consulted were experiencing costs that they were passing on, or considering passing on, to customers.

Higher fuel prices had already fed partly into the prices of other goods and services, the bank said. Short-term measures of inflation expectations remained elevated. The board judged that demand growth needed to stay subdued for a period to ease capacity pressure and bring inflation back to target. Although three earlier increases this year had tightened financial conditions and the economy appeared to be slowing, the board concluded that another increase was warranted.

The bank described an economy moving in different directions. June-quarter output growth was slightly stronger than it had expected, and business investment and debt growth were strong. At the same time, it saw consumer-spending growth easing gradually, housing prices falling in most capital cities and new housing loans declining noticeably. Labour-market conditions had eased broadly as expected, while leading indicators were broadly stable.

Earlier ABC News reporting put June-quarter economic growth at 0.4%, with output 2.1% higher than a year before. Both readings slightly exceeded economists’ forecasts cited by ABC. Before Tuesday’s decision, IFM Investors economist Alex Joiner warned that growth might not slow enough to meet the bank’s inflation objective. Capital Economics economist Marcel Thieliant cautioned that a rate rise was uncertain because the labour market was loosening and the housing downturn had worsened. Those were assessments made before the board voted.

Pressure on households and the next decision

The Guardian reported that higher rates would add to repayment costs for millions of mortgage holders. Governor Michele Bullock acknowledged the strain after the decision, telling reporters: ‘We knew that this was going to hit some people pretty hard.’ She said she hoped that bringing inflation down would make the decision worthwhile in the coming years. The available reporting does not establish a single repayment increase that would apply across households with different loans.

Bullock said the bank did not expect a recession and wanted to avoid a large increase in unemployment. She warned, however, that a much sharper slowdown might be needed if households came to accept inflation around 3% or 4% as normal. She also said there might be no need for another rate rise. The board’s written statement left both possibilities open, saying it would increase the cash rate further if needed to return inflation sustainably to target.

Reuters reported that markets assigned a 43% probability to another increase in November after the announcement. The Guardian reported differing bank forecasts: ANZ and UBS expected a November rise, while Commonwealth Bank and NAB expected rates to remain on hold. These are market and analyst judgments, not decisions announced by the RBA. The bank said the unresolved Middle East conflict could leave inflation higher and economic activity lower than forecast, making the next set of data particularly important to its assessment.

The political response also reflected disagreement over the causes of inflation. According to The Guardian, Treasurer Jim Chalmers said the government accepted responsibility for its part in addressing it, while attributing additional pressure to the US war on Iran. Opposition leader Angus Taylor blamed federal government spending for Tuesday’s increase. The August inflation release, scheduled by the Australian Bureau of Statistics for 30 September, had not yet been published at the time of the decision.