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The Reserve Bank of Australia has raised the cash rate to 4.6% in an effort to curb inflation and slow down the economy.
The Reserve Bank of Australia has raised the cash rate to 4.6%, its highest level in 15 years, in an effort to curb inflation and slow down the economy.
The decision was made unanimously by the bank's monetary policy board and is the fourth rate hike this year. The RBA said its target is for consumer price inflation to remain between 2 and 3%, but the current inflation rate is 3.5%. The bank pointed to a continuing picture of slow growth and high inflation as the reason for the rate hike. Growth in output has slowed, but was stronger than expected in the June quarter, the RBA said.
There are signs that growth in consumer spending is easing gradually, although housing prices have fallen in most capital cities and new housing loans have declined noticeably. The RBA is also keeping an eye on the jobs market, noting that labour market conditions have eased broadly as expected in recent months, and labour market leading indicators are broadly stable.
However, the unemployment rate has risen to 4.6%, the highest rate in nearly five years. The bank said that since the previous meeting last month, some of the upside risks to inflation are materialising. The conflict in the Middle East has broadened, and global energy prices are now much higher than had been assumed in the August forecasts. Higher fuel prices have partially been passed through to prices of other goods and services.
This inflation impulse is in addition to the effect of capacity pressures in the economy. The RBA said that its focus is on ensuring that high inflation does not become embedded, and it will need to bring inflation back to target. The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing.
RBA Highlights AI Inflation Impact
However, inflation is still too high, and the Board judged that a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period. The RBA also noted that the vast amounts of money being pumped into artificial intelligence is also pushing up inflation. AI-related demand is driving rapid growth in global prices for technology-related goods, the RBA said.
Firms are experiencing cost pressures and are either increasing the prices of their goods and services or looking to do so. Short-term measures of inflation expectations remain elevated. And recent inflation outcomes in Australia were stronger than expected at the previous meeting. The RBA 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 bank has encouraged any customers concerned about making their home loan repayments to get in touch, as financial assistance may be available. The Reserve Bank governor Michele Bullock has warned that the jobless rate may need to rise as high as 5%. Bullock will hold a media conference at 3.30pm, with markets and analysts expecting her to maintain a hawkish stance and reiterate that rates might have to rise further should inflation not cool as hoped.
ASX Reacts to Rate Hike Decision
The Australian share market opened higher in morning trading ahead of the RBA's decision, with the ASX 200 up 0.1%. The index had been trading at 8690, up about 0.11% for the day, at 2.20pm AEST. At 2.32pm, just after the rates call, the index was at 8675, down 0.04%. US bonds surged as Wall Street closed lower.
Higher interest rates will hit a housing market already weakened by higher borrowing costs and federal tax changes. Figures released in early September by property analytics firm Cotality showed house values have fallen. The RBA's decision to raise the cash rate to 4.6% has been welcomed by Treasurer Jim Chalmers, who noted that while today's decision was anticipated, it doesn't make it any easier for households.
Treasurer Blames Middle East Conflict
Chalmers said Australian workers didn't choose this war but they are paying a hefty price for it. The war has been a disaster for the global economy, Chalmers said, adding that inflation is much lower than its peak but it is higher than the RBA would like. The conflict in the Middle East is making inflation linger for longer and has a broader impact on the global economy.
CreditorWatch chief economist Ivan Colhoun said the RBA is expected to raise rates to fight inflation but that this likely will not be the end of the pain for borrowers. The main uncertainty is how long the economy can sustain further rate hikes without causing a recession.
FinancialReview 
abcnews:Live: RBA hikes interest rates to 4.6pc in fourth rate rise this year 
theage:RBA hikes interest rates to 4.6 per cent in 15-year high, open to further hikesThis story was compiled and edited by the HeadTopics newsroom and HT AI from the reports above.
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