Australia's central bank lifts rates to 18-year high, split vote points to pause ahead

The Reserve Bank of Australia (RBA) increased its cash rate to an 18-year high of 4.85% on Tuesday in its fifth rate hike of the year. The 6-3 vote reflected policymakers nearing the end of their tightening campaign. The bank stated it would continue to take measures necessary to bring inflation to target, but removed a reference to further rate hikes if needed.

The Australian dollar dropped 0.3% to $0.6977 following the less hawkish tone, suggesting the RBA may hold rates steady at its next meeting. However, there remains a 25% chance of a final rate hike by early next year. Governor Michele Bullock noted the need to assess the economy's response to tighter policy, acknowledging a slight upside risk to inflation.

Economic forecasts predict headline inflation to reach 4.5% in the fourth quarter, before easing to the target range of 2% to 3% in the second half of next year. Unemployment is expected to exceed 5% in the next two years. Thirty of 32 economists surveyed by Reuters anticipated a rate hike, while markets indicate an 88% probability of a move.

The RBA's 125 basis points of tightening this year have reversed the 75 basis points of easing from 2025, positioning Australia at the more hawkish end of developed market central banks.