RBA Hikes Cash Rate to 4.6%, a 15-Year High, Warns of Further Increases

The Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 4.6% on Tuesday, marking a 15-year high, and warned that further increases could follow if inflation remains “unacceptably high”. The decision was unanimous, ending a period of split votes on the monetary policy board, and represents the fourth rate rise this year.

Governor Michele Bullock attributed the move to persistent domestic pressures rather than solely external factors, directly challenging the government’s narrative that the Middle East conflict is the primary driver of inflation.

“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,” Bullock said in a blunt assessment. She cited the AI boom, the escalation of the war in Iran, and energy price rises as forces that would keep inflationary pressures “longer than previously expected”. Many businesses, she noted, are already increasing or considering increasing prices in response to higher costs.

“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 warned that if the public and businesses begin to accept inflation of 3% or 4% as normal, the economy could require “quite a dramatic slowdown” to bring prices under control, though she emphasised the bank does not want to create a recession.

Political blame game intensifies

The rate hike has sharpened the political divide over the causes of Australia’s inflation problem. Treasurer Jim Chalmers acknowledged the government’s responsibility in managing the budget but insisted the war in the Middle East had “turbocharged” inflation. “We do take responsibility for our part of the fight against inflation,” he said. “That’s why we will continue to manage the budget in a responsible way.”

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

One Nation deputy Barnaby Joyce called for the RBA to have a greater role in controlling government spending, suggesting the central bank should provide a “narrative on fiscal policy” to help keep the cash rate down. Changing the RBA’s mandate would be required for such a shift.

Immediate impact on borrowers

The Commonwealth Bank of Australia said it would pass on the full 25-basis-point increase to mortgage holders from October 9. The rise adds A$115 per month to the average new mortgage, feeding into what polls show is a growing affordability crisis that has driven some voters away from the major parties.

The RBA’s move pushes Australia’s official cash rate above those of other major Western economies. The US federal funds rate stands at 4%, while the Bank of England’s base rate is 3.75%. The last time Australia’s cash rate was above 4.5% was in October 2011.

Broader economic context

The rate decision comes as inflation jumped to 4% in August, a four-month high, increasing the likelihood of further tightening. The RBA’s board flagged that inflation figures released on Wednesday remained “unacceptably high”.

Bullock pointed to a collapse in productivity growth as a core reason for the rate hike, saying there is too much pent-up demand in an economy that cannot sustain it. “The bottom line is that productivity is doing nothing,” she said, urging governments to cut regulation and businesses to adopt new technologies.

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

Outstanding mortgage debt has more than doubled since the cash rate was last above 4.5%, rising from A$1.05 trillion in 2011 to A$2.51 trillion now. Higher borrowing costs and federal tax changes have already weakened the housing market.

Economists see risk of further hikes

AMP chief economist Shane Oliver said the RBA has likely done enough to weaken demand and push inflation back to target by the end of next year, but warned the central bank would retain a tightening bias. “Either way it’s unlikely to start cutting until around August next year,” he said.

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

Bullock expressed some optimism that the four rate hikes this year might be sufficient, saying she is confident the bank’s settings are now restricting demand. However, she left the door open for more action, stating that the board will continue to monitor incoming data closely.