RBA hikes interest rates to 2008 levels, sharply raises inflation forecasts
Investing.com– The Reserve Bank of Australia raised interest rates to a 18-year high on Tuesday and sharply hiked its inflation expectations for the year, warning of more rate increases.
The RBA hiked its cash rate target by 25 basis points to 4.85%, in line with market expectations. The decision was not unanimous, with three of the RBA’s nine-member rate-setting board voting in favor of a hold.
The cash rate is now at its highest level since late-2008, where the RBA had aggressively hiked rates in the wake of the global financial crisis.
Tuesday’s hike is the RBA’s fifth such move this year, and comes as the central bank struggles to quash sticky Australian inflation. A mix of higher energy prices– due to the Middle East conflict– plus strong domestic demand and artificial intelligence investment drove Australian consumer price index inflation to near three-year highs this year.
Core inflation, as measured by trimmed mean CPI, also sat well above the RBA’s 2% to 3% target range.
The RBA hiked its end-2026 CPI forecast to 4.7% from a prior forecast of 3.6%. Trimmed mean CPI is expected at 3.6%, up from prior forecasts of 3.3%.
“Given the revised inflation outlook and the continuing upside risks, the Board judged that a further tightening in financial conditions is warranted to support the return of inflation to target,” the RBA said in a statement.
“Monetary policy is well placed to respond to developments, and the Board is focused on its mandate to deliver price stability and full employment.”
The central bank flagged increasing risks that higher inflation expectations will become embedded– a scenario the RBA has constantly warned against.
Still, the RBA hiked its gross domestic product forecast for 2026, to 1.6% from 1.4%.
The RBA raised its unemployment forecast to 4.7% from 4.5% by end-2026, flagging some cooling in the economy due to high rates.
The Australian dollar weakened slightly after the RBA’s hike, with the AUD/USD pair falling 0.2%.
Capital Economics analysts said Tuesday’s move showed the RBA as more confident that monetary policy was sufficiently tight, and that the central bank’s next move would be a cut.
Original Article
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