The Reserve Bank of Australia raised interest rates to 4.85%, an 18-year high, as it warned that inflation remains above target. The Australian dollar slipped below US$0.70 after the decision. The bank's governor said the economy needs the move, while one economist put the risk of recession at 50-50.
The Reserve Bank of Australia raised interest rates by 0.25 percentage points to 4.85% on Tuesday, its fifth increase this year. The central bank said the inflation outlook was now materially higher, with fuel, commodities and AI-related investments driving up prices.
Australian dollar slips under US$0.70
The Australian dollar weakened as much as 0.35% to under US$0.70 after the announcement. The rise was widely expected and passed in a 6-3 vote.
The RBA does not expect inflation to return to its 2% to 3% target range until late next year, three quarters later than previously forecast. Underlying inflation hit 3.6% in the year to September, while overall inflation was up 4.3%.
Governor says the fifth rise is needed
Governor Michele Bullock told reporters the rise reflected a worsening inflation outlook. According to the FT, she said: "This is the right thing for the Australian economy."
Bullock also said the bank's baseline forecast does not foresee a recession. However, she warned that many Australians may perceive one has arrived with house prices tumbling and unemployment rising.
Paul Bloxham, chief economist at HSBC Australia, said there was a risk the Australian economy tips into recession and put the risk at a 50-50 chance. Unemployment rose to 4.7% last month.
RBA moves out of step with other central banks
The decision put the RBA out of step with the US Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of New Zealand, which held rates at recent meetings. Bullock countered that the bank's strategy was needed to reduce excess demand in the economy.
Shane Oliver, chief economist at AMP, said the cumulative rises would increase annual mortgage interest payments by A$6,600 (US$4,610) for many homeowners.
Source: Financial Times
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