Australia's central bank lifts rates to 15-year high, signals risk of further hikes

The Reserve Bank of Australia (RBA) increased its cash rate to 4.60%, the highest level in 15 years, on Tuesday, signaling the potential for further hikes. This move comes as inflation remains high, and the bank is prepared to take additional measures if necessary. The decision was anticipated, with the Australian dollar remaining stable at $0.7014 following a brief initial rise.

Markets now estimate a 43% chance of another rate increase in November after this latest decision. RBA Governor Philip Lowe explained that the bank's recent confidence was undermined by stronger-than-expected inflation and economic activity data. He added that balancing growth and inflation will become increasingly difficult. Since its September policy meeting, the RBA has raised rates by 25 basis points, completing a full percentage point tightening this year.

The board stated that they will continue taking necessary actions to bring inflation back to target, including further rate increases if required. Inflation data for August exceeded expectations, with headline inflation reaching 4.1%, significantly higher than the RBA's target range of 2% to 3%. Underlying inflation is also expected to remain elevated at 3.6% in September.

Factors contributing to the inflation surge include a surge in oil prices, increased domestic demand due to data center investments, and the impact of the US Federal Reserve raising interest rates. Despite these challenges, Australia's economy still grew at 2.1% in the second quarter, above the central bank's desired 2% growth rate.