RBA Hikes Key Rate to 18-Year High

The Reserve Bank of Australia raised its cash rate target by 25 bps to 4.85% in a 6-3 majority decision, with three members voting to hold rates steady. The hike was in line with expectations, marking the fifth increase this year and taking borrowing costs to their highest since late 2008. The move reflects persistent, broad-based inflationary pressures, with elevated fuel and commodity prices amid the Middle East conflict, tighter domestic capacity constraints and AI-related demand for technology goods contributing to rising costs. Firms are also reporting rising costs and passing them on to consumers. Inflation is expected to remain above 3% over the coming year, reaching the top of the 2–3% target range only in late 2027, raising the risk that higher inflation expectations become embedded. Meanwhile, growth is expected to slow further, housing prices have fallen significantly and unemployment is projected to rise more than previously anticipated.

Reserve Bank of Australia Assistant Governor Christopher Kent said in a speech that mounting evidence of rising global neutral interest rates raises doubts over whether policy is as restrictive as assumed despite four hikes this year. While confident that policy is somewhat tight, he questioned whether it is tight enough. A higher neutral rate suggests the 4.6% cash rate may be exerting less drag on demand and inflation than policymakers expect, strengthening the case for keeping rates elevated or tightening further. His remarks come as the RBA weighs its next move after September’s hike, citing persistent inflation, energy costs linked to Middle East conflict, and capacity pressures. Kent noted household demand is softening while business credit remains strong, and housing tax changes support restraint. On labor, he cautioned against over-reading monthly data but acknowledged easing, with September employment down and unemployment at 4.7%, a five-year high.

Minutes from the Reserve Bank of Australia’s September meeting showed that policymakers unanimously raised the cash rate by 25bps to 4.6%, citing persistent inflation risks. The meeting record also indicated that further rate hikes remained possible, as several upside threats flagged in August had materialised, including Middle East tensions driving oil above forecasts, global cost pressures partly tied to AI demand, and stronger domestic activity. Meanwhile, inflation readings exceeded expectations, with businesses reporting widespread cost pass-throughs. Short-term expectations stayed high, raising concern about medium-term drift. While the labour market eased broadly as anticipated, demand remained firm and capacity pressures stronger than assessed. Members warned that delaying action risked entrenching inflation after a prolonged period above target. They also noted that holding steady could weaken the Australian dollar as other central banks tightened.