RBA’s blunt warning for borrowers as inflation continues to bite
As painful as the Reserve Bank of Australia’s fourth interest rate hike for the year will be, it’s not necessarily the end of the road for struggling Australians.
The bank’s monetary policy board on Tuesday unanimously pushed the cash rate to 4.6 per cent, its highest level since 2011.
RBA Governor Michele Bullock speaks to the media following an RBA interest rate increase Louise Kennerley
The jump itself was unsurprising, meaning all the attention was on whether what the board and RBA chief Michele Bullock had to say afterwards gave any clues about future hikes.
It wasn’t great news for anyone hoping for a definitive end to the hikes.
In good news, from the bank’s point of view, the economy appeared to be slowing after three earlier rate hikes. But in bad news for everyone, it deemed inflation to still be too high.
“The board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed,” it said.
The board warned of inflation risks in August and on Tuesday said some of them had “materialised”.
“The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts,” it said.
“AI-related demand is driving rapid growth in global prices for technology-related goods.”
The highest chase rate in 15 years is made worse by the fact home loan debt has more than doubled in that time to $2.51 trillion.
Tuesday’s increase adds $91 a month to a typical $600,000 mortgage with 25 years remaining, or $364 when the cumulative impact of all four hikes are taken into account.
Attention is now on Wednesday’s monthly inflation figures and the quarterly numbers due next month.
Bullock said she’d be hoping for something like 0.6 per cent in the quarterly figures as a sign that the yearly number was heading back towards the bank’s 2-3 per cent target range.
The bank’s preferred trimmed mean inflation rate sat at 3.6 per cent in July.
That might not sound too far off but Bullock had a warning for anyone starting to suggest the current level of inflation was acceptable.
It’s the bank’s job to keep inflation in check without crashing the economy. As Bullock likes to remind people, she only has one tool: the cash rate.
Every hike puts more pressure on households and naturally generates questions about whether Australia will fall off the “narrow path” the bank is trying to set and into the valley of a recession.
The Reserve Bank said global factors could keep inflation higher for longer than previously expected. Louise Kennerley
Bullock said that was not the bank’s “base case” “at this point” but warned it could be necessary if inflation expectations “get away from us”.
“If people start saying, you know what, three point something’s fine or four’s fine – and you do hear some of that – if that gets away, then that is a circumstance in which I think you might need to have quite a dramatic slowdown in the economy,” she said.
“ … back to the mortgage holders and so on, I know they don't understand why we have to do this and it hurts them, but the point is, if we don't address this, inflation will get worse, and interest rates will have to be higher, and the economy in a worse position in order to address that.
“So that's, you know, it's not our base case. I don't want it, but if inflation expectations get away, that's the sort of scenario you might be looking at.”
Bullock said the global AI investment boom was adding to inflation pressures in Australia, as surging demand drives up the cost of key inputs.
Alongside disruptions to global oil supplies, the Reserve Bank said global factors could keep inflation higher for longer than previously expected.
Chalmers defends government spending
Treasurer Jim Chalmers has been quick to blame inflation on the global unrest and soaring fuel prices caused by the war in the Middle East.
"Australian workers didn’t choose this war, but they are paying a hefty price for it," he said, in a statement.
"The war has been a disaster for the global economy.
"The market is pricing in multiple rate rises in every major advanced economy."
But Bullock was clear that Australia’s inflation problem was not “all about the Middle East conflict”.
“It is making things much worse. But we did start from a position of excess demand anyway, and that’s why we started raising interest rates even before the conflict started,” she said.
“But it’s made it worse. And the longer it goes on, I think the more challenging it is to keep inflation expectations grounded at a level lower than what inflation is at the moment.”
Treasurer Jim Chalmers has been quick to blame inflation on the global unrest and soaring fuel prices caused by the war in the Middle East. 9News
Questioned repeatedly about whether government spending was juicing the economy and driving up inflation, Chalmers said the government took some responsibility.
“The job that I’m focused on is getting the budget in better shape,” he said at a press conference on Tuesday.
"That's my focus. That is to work on the areas where I have responsibility, accept responsibility for our part of the fight against inflation.
"Commentators will say what they will. I'm focused on the job at hand."
Shadow treasurer Tim Wilson made the most of the bad news for the government, calling his federal counterpart "inflation addicted", a "taxaholic" and "Pyro Jim the inflation arsonist".
"Jim Chalmers has been playing a game of interest rate chicken with the Reserve Bank," he said in a statement.
"Today, the RBA blinked, and Australian families and small businesses are the ones who keep getting run over."
Shadow treasurer Tim Wilson made the most of the bad news for the government Dominic Lorrimer
Opposition leader Angus Taylor also lined up to take a pot shot at the government, insisting Australia’s inflation problem was “home-grown”.
“This is of the governments making,” he told the Today Show on Wednesday.
“If the government simply had a rule where it said ‘if we’re going to spend more, we’re going to find a saving’, we’d be running a $22 billion dollar surplus right now, and we’d have taken interest pressure right off Australian households.”
He denied the notion that the Middle East war had been the catalyst for Australia’s interest rate woes.
“The point is we were seeing interest rate increasing and inflation increases before the war in the Middle East,” he said.
“It’s not to say higher fuel prices aren’t hurting - they are - but this was in motion before that.”
More pain to come?
Market watchers are split on where rates go from here. ANZ is forecasting another hike but Commonwealth Bank, Westpac and National Australia Bank expect this to be the last one for the year.
Oxford Economics head of economic research and global trade Harry Murphy Cruise is expecting a “wait-and-see approach” for the last meeting of the year before a final hike in February.
“Today’s meeting was less about what the board did (we were confident they’d hike) and more about what they said to give us a steer on future rate moves,” he said.
“The unanimous decision to hike was accompanied by a relatively hawkish statement, outlining upside inflation risks that are now materialising, but also giving the board an out (or at least a pause) by noting uncertainty around the Middle East conflict and a slowing economic outlook.”
The war in Iran is having an impact on inflation but doesn’t tell the whole story. AP Photo/Vahid Salemi
Etoro Asia Pacific lead analyst Josh Gilbert said markets were judging another hike this year as more likely than not.
“There wouldn’t have been too many people calling for four rate hikes from the RBA in 2026, but that’s where it stands, and now there’s the potential for a fifth before the year is out,” he said.
“The fact that the board had to move again after already starting 2026 in the shadow of three consecutive hikes shows how stubborn price pressures have become.
“The RBA has kept its tightening bias firmly in place and there was nothing in today’s statement to suggest the board will ease off anytime soon.”
Tuesday’s decision puts Australia’s cash rate below only Iceland when it comes to economies the International Monetary Fund classes as advanced.
Vanguard senior economist Dr Grant Feng said the bank appeared to have shifted to be more proactive in controlling inflation.
“Having historically lagged the global interest-rate cycle, the RBA now appears to be adopting a more pre-emptive approach,” he said.
“Four rate increases suggest that the Bank is increasingly willing to act before a clear deterioration emerges in the activity data, rather than waiting for inflation pressures to become more deeply entrenched.”
Bullock left Tuesday’s press conference with a cold shower for those hoping for a return to the super-low interest rates seen before and during the COVID-19 pandemic.
“I think the point is, I don’t know if this particular level is the new normal, but what I do know is that we’re not going back down to interest rates of zero, or very close to zero policy rates,” she said, describing the pandemic rates as “the exception”.
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