Australia’s central bank lifts rates to 15-year high

The Reserve Bank of Australia raised its cash rate to a 15-year high of 4.6% in its fourth rate hike of the year on Tuesday. The board voted unanimously to increase rates by 25 basis points, bringing the total tightening this year to a full percentage point. Central bank governor Michele Bullock acknowledged some inflation risks had materialized, but the bank remains prepared to hike further if needed.

The move was widely anticipated, with the Aussie dollar slipping 0.4% to US$0.6989 and three-year government bond yields falling 6 basis points to 4.974%. Markets currently suggest a 33% probability for a November hike, with almost full pricing in a rate increase by February next year. Inflation surpassed expectations in July, with Brent crude prices rising over 20% since the RBA's last meeting in August, threatening broader price pressures.

The board noted that rising fuel costs have pushed headline inflation to 4.1% in August, significantly above the RBA's target band of 2% to 3%, while underlying inflation is expected to remain sticky at 3.6%. The RBA will continue to take action if necessary to bring inflation back sustainably to target. A data center investment boom worth up to A$175 billion (US$122.8 billion) is also adding to domestic demand.

Australia's economy has slowed due to higher borrowing costs, but not sufficiently to eliminate inflation concerns. Annual growth remains at 2.1% in the second quarter, still above the central bank's 2% growth threshold. Household spending remained robust at 6.8% annual rate, despite a slowdown in August. The Australian labour market is gradually easing, with employment growth exceeding expectations and the unemployment rate up to 4.6%, though more people entered the workforce.

The RBA is likely to maintain a tightening bias in the coming months, with a high risk of another rate hike before the next meeting in November.