Australia's central bank delivered its fifth rate hike of the year so far in the face of unrelenting inflationary pressures that are not expected to abate anytime soon.
The Reserve Bank of Australia on Tuesday raised its cash rate target by 25 basis points to 4.85%, taking the rate to an 18-year high and placing further strain on mortgage borrowers across the country.
The central bank said the latest increase partly reflects elevated prices for fuel and other commodities that have been driven higher as a direct result of the Middle East conflict. But at the same time, domestic capacity pressures now appear to be "a little tighter" than policymakers thought earlier.
The rate hike was widely expected by the market following a hotter-than-expected consumer price index print for September. The month's annual inflation reading accelerated to 4.3% from 4% in August as both housing and transport costs continued to surge.
Not only is inflation still "too high," it is now forecast to remain elevated through most of 2027 and is not expected to hit the top of the bank's 2% to 3% target range until the tail end of next year, around three quarters later than previously estimated, the Reserve Bank said. It will take even longer, possibly until mid-2028, for inflation to return to the middle of the target band.
"Given the revised inflation outlook and the continuing upside risks, the board judged that a further tightening in financial conditions is warranted to support the return of inflation to target," the central bank said.
It also pointed to a greater risk of higher inflation expectations becoming embedded, and repeated its pledge to do whatever is necessary to bring inflation back down to target.
The latest hike was a majority decision, with six policymakers backing the 25-basis point increase and three board members dissenting with votes to hold the rate at 4.60%.
At a press conference following the policy move, central bank Governor Michele Bullock said inflation is already "baked in" for 2027 monetary policy. She added that the rate hikes so far this year will take at least 12 months to fully flow through the Australian economy.
Australia is now at, or close to, the cash rate peak, ANZ said in a report. The bank is not forecasting another increase even though it acknowledged some risk of a hike in December or February next year if further evidence emerges of inflation expectations moving higher or if upside risks materialize.
Bullock seemed to echo that sentiment, saying that the possibility of further hikes is not as obvious now as it was earlier in the year.
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