Australia’s Central Bank Raises Rates to Combat Inflation
Australia’s central bank raised its cash rate to an 18-year high of 4.85% on Tuesday, marking its fifth hike of the year. The Reserve Bank of Australia’s board voted to increase rates by 25 basis points at its November meeting, despite a closer-than-expected vote with three of nine members favoring no change.
Inflation concerns drive rate hike
The decision comes as the bank aims to tackle persistent inflation, which has remained above its 2-3% target band for over five years. Underlying inflation reached a two-year high of 3.7% in the third quarter, prompting the bank to act. Policymakers are particularly concerned about raised oil prices, which could exacerbate broader price pressures and destabilize inflation expectations.
Impact on markets and economy
The rate hike had an immediate effect on financial markets, with the Australian dollar slipping 0.3% to US$0.6979 and three-year government bond futures falling 3 ticks to 95.14.
Risks of a harder landing
The labor market has also softened, with the unemployment rate hitting a five-year high of 4.7%. The central bank still judges it to be a little tight and a source of inflationary pressures. HSBC’s chief economist, Paul Bloxham, warns that the risks of a harder landing – or even a recession – are rising. The RBA’s options have become much more limited, and the hope for a narrow pathway to full employment and on-target inflation has faded.
