The Reserve Bank of Australia has raised the cash rate from 4.35% to 4.6%, its highest level since late 2011, as it continues to battle persistent inflation.
The increase is the fourth this year and will add about A$120 a month to repayments on an average A$730,000 mortgage. Combined, this year’s rate rises have increased monthly repayments by roughly A$480, putting further pressure on household spending.
The decision highlights the difficult position facing the RBA. Inflation remains above target, while economic growth is slowing, the housing market is weakening and consumer confidence is subdued.
RBA Governor Michele Bullock said a recession was not the bank’s central expectation “at this point”, but the board has left the door open to further rate rises if needed.
Inflation remains too high
Annual inflation was 3.5% in July, while underlying inflation stood at 3.6% — both above the RBA’s 2–3% target range.
The RBA said some of the inflation risks it identified in August are now materialising. Global energy prices have risen more than expected, while stronger demand for technology goods, including products linked to artificial intelligence, is also contributing to price pressures.
Domestically, demand remains stronger than the economy’s ability to supply goods and services. Businesses are reporting higher costs and passing some of those increases on to consumers.
Higher interest rates cannot reduce global oil prices, but the RBA is seeking to prevent temporary cost increases from becoming embedded across the economy. Bullock has indicated that further weakness in the labour market may be needed to reduce inflationary pressure.
Economic growth is losing momentum
The economy grew just 0.4% in the June quarter, while unemployment rose to 4.6% in August. Household spending was flat in August after increasing 1.1% in July.
The housing market is also weakening. National home values fell 0.9% in August, their fifth consecutive monthly decline, leaving prices 3.6% below their March peak.
Consumer confidence fell 5.2% in September, although business investment and lending remain relatively strong.
The RBA says domestic spending and investment have been stronger than expected despite weaker sentiment and housing conditions. This resilience is one reason policymakers believe inflationary pressure has not yet eased sufficiently.
Will rates rise again?
The next question is whether the RBA will increase rates again at its November meeting.
ANZ is currently the only major bank forecasting another hike, while Commonwealth Bank, Westpac and National Australia Bank expect rates to remain unchanged after September.
The RBA will have more inflation, employment and household spending data before its next meeting. Those figures will help determine whether the latest increase is enough.
For now, the RBA faces a delicate balancing act: inflation remains too high, but higher rates are placing increasing pressure on households, businesses, housing and an economy already showing signs of slowing.
