RBA Lifts Cash Rate to 15-Year High of 4.6%, Flags More Hikes if Inflation Stays Elevated

The Reserve Bank of Australia lifted the cash rate to 4.6 per cent on Tuesday, its highest level in 15 years, and signalled more increases could follow if inflation data due Wednesday remains elevated.

The board was unanimous in backing the fourth rate hike this year, after being split on previous decisions. The move takes Australian borrowing costs above those in the United States (4 per cent) and the United Kingdom (3.75 per cent), giving the country one of the highest official interest rates among major Western economies.

The rate rise will add A$115 per month to the average new mortgage, intensifying an affordability crisis that has driven voters away from mainstream parties. The last time the cash rate stood above 4.5 per cent was October 2011. Total outstanding residential mortgages have more than doubled since then, jumping from A$1.05 trillion to A$2.51 trillion.

Reserve Bank Governor Michele Bullock warned that stubborn inflation and weak productivity pose the main risks to the outlook. “Inflation is too high and has been driven by domestic capacity pressures … The inflation impulse from the Middle East conflict is in addition to this,” she said, challenging the Labor government’s narrative that the war in the Middle East is the primary cause of rising prices.

Bullock pointed to the AI boom, the escalation of the war in Iran, and energy price rises as factors suggesting inflationary pressures will persist “longer than previously expected.” Many businesses are already increasing or considering price rises in response to higher costs, 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 governor stressed that the core reason for the hike was too much pent-up demand in an economy that cannot sustain it because productivity has 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.

Bullock conceded the rate rise could worsen the housing supply crisis by making construction unprofitable, but argued a tough approach is needed to prevent businesses from embedding higher prices. “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 emphasising the bank does not want to create a recession.

Treasurer Jim Chalmers said the war in the Middle East had “turbocharged” inflation, but added: “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.”

Opposition Leader Angus Taylor called the decision 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.”

Bullock expressed some optimism that the four rate rises so far may be enough to combat price pressures, saying she was confident the bank’s settings were now restricting demand. She noted that rate increases help beat inflation by strengthening the dollar and making imports cheaper, not just by raising mortgage payments.

The economy grew 2.1 per cent last financial year, but gross domestic product per person rose only 0.7 per cent. The Reserve Bank forecasts growth will slow to 1.5 per cent in the year to June 2027. The unemployment rate reached 4.6 per cent last month, the highest in nearly five years, though Bullock described the labour market as still strong in historical terms.

Higher interest rates are set to hit a housing market already weakened by rising borrowing costs and federal tax changes.

AMP chief economist Shane Oliver said the risks of another rate hike remain 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 continue, the bank may need to increase interest rates again, “possibly before the end of the year,” to ensure inflation is brought under control.