RBA Hikes to 15-Year High of 4.6%, Bullock Warns of Further Tightening

The Reserve Bank of Australia lifted the cash rate to 4.6% on Tuesday, a 15-year high, and its monetary policy board signalled additional increases may be needed if inflation remains “unacceptably high.” The move marked the fourth rate rise this year, backed unanimously by a board that had been split on previous decisions.

RBA Governor Michele Bullock said inflation was “too high” and had been driven by “domestic capacity pressures,” adding the impulse from the Middle East conflict was “in addition to this.” She pointed to the AI boom, the escalation of the war in Iran, and energy price rises as factors suggesting inflationary pressures would persist “longer than previously expected.” Many businesses were already increasing prices or considering doing so, she said.

“The Middle East conflict has been a big shock, and it’s made us all poorer in this country. That is a fact,” Bullock said. “But I want to make that clear, this isn’t all about the Middle East conflict.”

The core reason for the hike, Bullock stated, was excess demand in an economy where productivity had “cratered” under successive governments. “The bottom line is that productivity is doing nothing,” she said, urging governments to cut regulation and business leaders to embrace frontier technologies. She declined to assign blame for the slump.

Bullock warned that if businesses and politicians fail to tackle the productivity malaise, an economic downturn may become necessary. “If people start saying, ‘You know what, three-point-something is fine or four [per cent inflation] is fine’ … then that is a circumstance in which I think you might need to have quite a dramatic slowdown,” she said, while stressing the bank did not want to create a recession. She conceded the rate hike could exacerbate the housing supply crisis by making construction unprofitable.

The cash rate increase will add $115 per month to the average new mortgage. Australia’s official rate now stands above that of the US (4%) and the UK (3.75%). The last time the cash rate exceeded 4.5% was October 2011. Since then, the total value of outstanding residential mortgages has more than doubled to $2.51 trillion from $1.05 trillion.

The move comes as the unemployment rate reached 4.6% last month, the highest in nearly five years, though Bullock described the labour market as strong in historical terms. The economy grew 2.1% last financial year, but GDP per person rose just 0.7%. The Reserve Bank forecasts growth to slow to 1.5% in the year to June 2027.

**Political Reactions**

Treasurer Jim Chalmers acknowledged the government’s role in fighting inflation but continued to emphasise the Middle East war as the primary driver. “It’s abundantly clear that war in the Middle East has turbocharged inflation,” he said Tuesday. “[But] we do take responsibility for our part of the fight against inflation. That’s why we will continue to manage the budget in a responsible way.”

Assistant Treasurer Daniel Mulino told ABC TV on Wednesday that the government was doing “all it can” to bring down inflation, citing international pressures outside its control. He pointed to the Reserve Bank governor’s statement, which identified the longer-than-expected duration of the Middle East war and its impact on world energy prices. Mulino said the government had pulled back on spending, noting $64 billion in savings over the forward estimates in the last budget.

Opposition Leader Angus Taylor called Tuesday a “dark day” for mortgage holders. “This is avoidable,” he said. “The current interest rates are a result of Labor’s actions. We know that this is a government that is spending too much.”

Deputy Opposition Leader Jane Hume said Labor’s failure to boost productivity had left Australia vulnerable to international events. “What [the government] really needs to do, and Michele Bullock has been saying this, is drive productivity,” she told Radio National. “The real issue here is whether your economy is resilient enough to be able to handle those international shocks.” She added the rate rise demonstrated that Chalmers had been “unable to control the domestic factors using the fiscal levers.”

One Nation leader Pauline Hanson called for Chalmers to resign following the rate decision, according to reports.

Bullock expressed some optimism that the four rate hikes this year might be enough to combat price pressures, saying she was confident the bank’s settings were now restricting demand. But economists cautioned against expecting a near-term reprieve.

AMP chief economist Shane Oliver said the risks of another hike remained high. “The RBA has likely now done enough to weaken demand sufficiently to push inflation back to target by the end of next year,” he said. “But with inflation being above target for five of the last six years the RBA is likely to retain a tightening bias for a while to come. Either way it’s unlikely to start cutting until around August next year.”

EY chief economist Cherelle Murphy said if current circumstances continued, the bank may need to increase interest rates again, “possibly before the end of the year,” to ensure inflation is brought under control.