SYDNEY – The Reserve Bank of Australia raised its cash rate to a 15-year high of 4.60% on Sept 29 in its fourth hike of the year, saying inflation was too high and that it was prepared to hike further if needed.
The move was widely expected, with the Aussie dollar little changed at $0.7014 after a short-lived knee-jerk rise. Markets are now pricing in a 43% probability for another rate rise in November after the latest move.
“Since the August meeting, the key developments for the RBA have been stronger than expected inflation and activity data, making it increasingly difficult for the bank to have confidence in a gradual return of inflation to target,” said Adam Bowe, head of Australia portfolio management at PIMCO.
“While the Bank has kept the door open to further tightening we expect that the trade off between growth and inflation will become more challenging from here.”
Wrapping up its September policy meeting, the RBA board voted unanimously to lift rates by 25 basis points, bringing the tightening this year to a full percentage point.
“Since the previous meeting, some of the upside risks to inflation are materialising,” said the board.
“There have been further disruptions to global oil supply and recent data suggest that growth and inflation in Australia have been higher than expected.”
“The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed,” the board added.
Markets had fully priced in a hike given inflation came in hotter than expected in July, oil prices had surged anew amid few signs of a resolution in the Gulf conflict, and policymakers had repeatedly warned that inflation risks could be materialising.
Brent crude has climbed nearly 20% since the RBA last met in August, threatening a broadening of price pressures.
Rising fuel costs are expected to have pushed headline inflation back up to 4.1% in August, well above the RBA’s target band of 2% to 3%, while underlying inflation likely remained sticky at 3.6%, data due on Sept 30 are forecast to show.
“After some early optimism that the pass-through from firms to households was more moderate than feared, recent evidence shows otherwise, with underlying inflation moving higher,” said Harry Murphy Cruise, head of economic research at Oxford Economics Australia.
“There’s also increasing evidence that interest rates haven’t been as effective in crimping demand as initially expected.”
A data centre investment boom, estimated by Westpac to be worth as much as A$175 billion (S$158.5 billion), is adding to domestic demand.
RBA Deputy Governor Andrew Hauser recently returned from the US more worried about inflation after having seen the AI-driven investment frenzy firsthand.
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The RBA’s 100 basis points of tightening in 2026 has more than reversed the 75 basis points of policy easing from 2025.
That leaves Australia ahead of much of the developed world.
The US Federal Reserve in September delivered its first rate hike in more than three years, while the European Central Bank has raised rates twice this year.
Australia’s economy has slowed amid higher borrowing costs, but not enough to dispel inflation concerns.
Annual growth still ran at 2.1% in the second quarter, above the 2% speed limit the central bank believes can be sustained without generating inflation.
Household spending did go flat in August after a strong three-month run, but the annual rate remained robust at 6.8%.
The labour market is gradually easing but was still judged to be tight by the RBA.
Employment growth exceeded expectations in August, while the jobless rate edged up to 4.6% only because more people entered the workforce. REUTERS
