Australia’s Central Bank Hiked Rates Again and the Board Was Split

Keypoints:

• The cash rate rose 0.25 points to 4.85 percent, the highest since 2008
• It's the fifth hike this year
• The vote was 6 to 3, with three members wanting to hold
• Inflation is expected to stay above 3 percent for the next year
• The next decision is on 8 december

The Reserve Bank of Australia raised its cash rate by a quarter point to 4.85 percent on Tuesday, Melbourne Cup day. That's the highest level since November 2008 and the fifth increase this year, which puts a lot of borrowers in unfamiliar territory.

It wasn't an easy call. Six board members voted to hike and three wanted to hold at 4.60 percent. The bank's reasoning is that inflation is stubborn and broad. Prices are rising in lots of areas, not just a few, and the updated forecasts now see inflation staying above 3 percent for the coming year. The RBA doesn't expect it to get back to the top of its 2 to 3 percent target range until late 2027, roughly three quarters later than it thought before.

A few things are pushing prices up. Fuel and other commodity costs are higher, and the bank thinks capacity in the economy is a little tighter than it believed. Firms are also passing on their own cost pressures. One interesting detail is that AI related investment is driving fast price growth for technology goods, and data centre spending is expected to keep business investment strong in the near term.

At the same time the economy is cooling. Housing prices have fallen significantly, unemployment has ticked up, and the bank expects it to rise by more than it forecast in August. Growth is expected to slow further over the next year. That's why one economist described more hikes as increasingly difficult to justify, and why three board members voted no. On the bright side, the bank says growth in Australia's major trading partners has been stronger than expected, with AI investment outweighing other drags.

For households, lenders are already moving. Macquarie, for example, says its variable home loan rates will rise by 0.25 percent from 19 November, and its savings rates will rise in line. The RBA says it will keep watching the data and do what it takes to bring inflation sustainably back to target. Its next decision is on 8 December.