RBA interest rates: Reserve Bank hikes cash rate by 25 basis points to 4.35% | Interest rates

Australia’s borrowers have been dealt another blow with the Reserve Bank lifting its key interest rate for the first time in five months to ensure inflation keeps falling.

The RBA board on Tuesday decided to hike its cash rate 25 basis points to 4.35%, a 12-year high. The increase, widely anticipated by economists, was the central bank’s 13th rate rise since May 2022.

New governor Michele Bullock and the board had lately sent repeated signals they were poised to resume rate rises if inflation didn’t slow as expected. The RBA remains ready to hoist interest rates again if required, she said in an accompanying statement.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” Bullock said. The central bank had received fresh data since its August meeting and “the weight of this information suggests that the risk of inflation remaining higher for longer has increased”.

“While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year,” she said. “Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.”

Treasurer Jim Chalmers said the rate rise would “make life harder for people who are already doing it tough”. “Now, the primary driver of inflation in the most recent data was petrol, but there are other inflationary pressures in our economy as well as the Reserve Bank is responding to that.”

The quarter-point increase will add roughly $100 to monthly repayments for a standard loan of about $600,000. Since the rate-increase cycle began, such mortgagors will be paying about $1450 more each month to lenders once the latest hike is passed on, according to RateCity data.

Increase to monthly repayments after Reserve Bank’s 0.25%-point hike in November

Markets have shifted to expect today’s rate increase after inflation numbers for the September quarter came in higher than the RBA’s own predictions. The annual pace of price increases had also accelerated from 4.9% in July to 5.6% in September.

Inflation has been above the RBA’s 2%-3% inflation target range for a record 10 quarters, according to UBS. From projections made in August that goal won’t be reached until seven more quarters, and possibly later if forecasts by the International Monetary Fund – based on talks with Australian authorities – are correct.

The RBA’s view is that “[w]hile the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected,” Bullock said. “CPI inflation is now expected to be around 3.5% by the end of 2024 and at the top of the target range of 2 to 3% by the end of 2025.”

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“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,” Bullock said in the statement.

For now, though, investors pared some of the speculation that the central bank will hike again. Today’s statement did not repeat the language from the October board meeting that “some further tightening of monetary policy may be required”.

As a result, the Australian dollar sank to about 64.3US cents from above 64.8 just prior to the rates decision being made public. Higher interest rates tend to attract investors seeking larger returns.

Shares, meanwhile, pared their losses of 0.4% for the day to end trading 0.3% lower. Company profits tend to be reduced if interest rates increase.

Attention will now shift to September quarter wage price index figures due for release by the Australian Bureau of Statistics on 15 November. A sharp pickup in wages may prompt pundits to predict a back-to-back rate rise when the RBA next meets on 5 December.

Acting shadow treasurer Jane Hume said the increase was “the consequence of a government that has spent the past 17 months with the wrong priorities, without a plan to tackle inflation and without a plan to lower the cost of living”.

One positive note was the RBA now expects “a more moderate increase than previously forecast” for the jobless rate.

Now at 3.6%, the unemployment rate is tipped to “rise gradually to around 4.25%”, the statement said, or less than the 4.5% level previously expected to be reached by mid-2025.

“My expectation is that the RBA will not rush into another rate rise in December but instead assess inflation and growth trends over the next few months, with a potential further rate rise in February if the [December quarter consumer price index] on 31 January remains uncomfortably high,” David Bassanese, chief economist for BetaShares said.

Of the big four banks, only Nab continues to predict another rate increase, with a 4.6% rate peak in February although the December RBA meeting remains “live”.

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