RBA Hikes Rates to 4.6%, a 15-Year High, Signaling More Tightening Ahead

The Reserve Bank of Australia (RBA) lifted its official cash rate to 4.6 per cent on Tuesday, a 15-year high, and its monetary policy board – unanimous on the decision – flagged the possibility of more increases if inflation data due Wednesday remains elevated.

The fourth rate rise this year comes despite rising unemployment, falling house prices and sluggish economic growth. The RBA board, which had been split on some previous decisions, voted unanimously for the increase.

Governor Michele Bullock said Australia was being hit by “domestic capacity pressures” as well as extraordinary shocks, including the ongoing war in Iran, spending on artificial intelligence, and a lack of productivity. She warned there could be more hikes on the way.

“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 statement that directly challenges the federal government’s emphasis on global factors.

Bullock acknowledged the Middle East conflict had been “a big shock” that made the country poorer, but stressed: “I want to make that clear, this isn’t all about the Middle East conflict.”

She said the AI boom, escalation of the war in Iran, and energy price rises suggested inflationary pressures would persist for longer than previously expected, with many businesses already increasing or considering price rises due to higher costs.

Bullock warned that if businesses and the public accepted inflation of “three-point-something or four per cent” as normal, the economy might need “quite a dramatic slowdown”. She emphasised the central bank did not want to create a recession, but said a tough approach was needed to prevent firms from embedding higher prices.

The rise adds $115 per month to the average new mortgage, deepening an affordability crisis that polls show has driven voters from the major parties to One Nation.

**Political fallout**

Treasurer Jim Chalmers said the government took responsibility for its role in managing inflation, but continued to blame the war in the Middle East for the continuous rate hikes.

“It was abundantly clear that war in the Middle East had ‘turbocharged’ inflation,” Chalmers said. “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 insisted the government was doing “all it can” to bring down inflation, citing international pressures. “If you look at the Reserve Bank governor’s statement yesterday explaining the reasons for the decisions, the two major things that were identified were the longer than expected duration of the war in the Middle East, and the fact that it has had a greater than expected impact on world energy prices,” he told ABC TV.

One Nation leader Pauline Hanson called for Chalmers to resign following the decision. Opposition Leader Angus Taylor described Tuesday as a “dark day” for mortgage holders. “This is avoidable,” Taylor 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 argued that Labor’s failure to boost productivity had left Australia vulnerable to international events. “The real issue here is whether your economy is resilient enough to be able to handle those international shocks,” she told Radio National. “This particular rate rise … has demonstrated that Jim Chalmers has been found out.”

Bullock herself declined to assign blame for the productivity slump. “The bottom line is that productivity is doing nothing,” she said, urging governments to cut regulation and business leaders to embrace frontier technologies.

**Economic context**

Australia now has one of the highest official interest rates among Western economies, surpassing the US (4 per cent) and the UK (3.75 per cent). The last time the cash rate was above 4.5 per cent was October 2011.

Since then, outstanding mortgage debt has more than doubled. The total value of residential mortgages in 2011 was $1.05 trillion; it has since climbed to $2.51 trillion.

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. The economy grew by 2.1 per cent in the last financial year, but GDP per person rose just 0.7 per cent. The RBA forecasts growth to slow to 1.5 per cent in the year to June 2027.

Higher rates will hit a housing market already weakened by higher borrowing costs and federal tax changes. Bullock conceded the latest hike could exacerbate the housing supply crisis by making construction unprofitable.

**Outlook**

Bullock expressed some optimism that the four rate rises this year might be enough to combat price pressures, saying she was confident the bank’s settings were now restricting demand. However, she warned that if Wednesday’s inflation figures remained “unacceptably high,” further increases could follow.

AMP chief economist Shane Oliver said the risks of another rate 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 that if current circumstances continued, the bank may need to increase rates again “possibly before the end of the year” to ensure inflation is brought under control.

The RBA’s next decision is scheduled for November. All eyes will be on Wednesday’s monthly inflation print from the Australian Bureau of Statistics.