By Stella Qiu and Wayne Cole
SYDNEY, Nov 3 (Reuters) – Australia’s central bank raised its cash rate to an 18-year high on Tuesday in its fifth hike of the year, though a surprisingly narrow 6-3 vote signalled policymakers may be nearing the end of their tightening campaign.
Wrapping up its November policy meeting, the Reserve Bank of Australia’s board lifted rates by 25 basis points to 4.85% and said it would continue to do what it considers necessary to bring inflation to target. However, it did remove a reference to increasing the cash rate further if needed.
Markets seized on the less hawkish tone, pushing the Australian dollar 0.3% lower to $0.6977 and strengthening bets that the RBA will leave rates unchanged at its meeting next month. There is still a 25% chance of one final rate hike by early next year.
Governor Michele Bullock said it was unclear what the next move in interest rates would be, adding that the three dissenting members placed greater weight on downside risks as the housing market weakened and unemployment rose.
She added that, after five rate hikes this year, it was an appropriate time to pause and assess how the economy responded to tighter policy, but cautioned that “there is still a bit of a skew on the upside to inflation risks, and we need to be alert to those materializing.”
Updated economic forecasts from the central bank showed headline inflation was set to hit 4.5% in the fourth quarter, before easing back to the target band of 2% to 3% in the second half of next year.
Unemployment is forecast to climb above 5% in the next two years.
Thirty of 32 economists polled by Reuters expected a hike, while markets implied an 88% chance of a move after hot third-quarter inflation data and hawkish commentary from policymakers eclipsed concerns about unemployment climbing to a five-year high..
“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 its policy statement.
“The Board will continue to do what it considers necessary to bring inflation sustainably back to target.”
TOUGH CHOICES
The RBA’s 125 basis points of tightening this year has more than reversed the 75 basis points of policy easing from 2025, putting Australia at the hawkish end of developed market central banks. Elsewhere, the Federal Reserve stayed on hold this month while the Reserve Bank of New Zealand stunned markets by pausing in a razor-thin vote.
Stephen Smith, a partner at Deloitte Access Economics, said the split 6-3 vote reflected the difficult trade-off facing policymakers as households cut spending and businesses grapple with softer demand.
“Today’s increase adds to the risk that growth will weaken by more than expected through next year, even as inflation stays elevated,” Smith said.
Sally Auld, chief economist at the National Australia Bank, judged the board is now likely comfortable with the assessment that monetary policy is in restrictive territory.
“While we are not forecasting further policy tightening from here, there is little doubt the RBA will be sensitive (and responsive) to any upside surprise in inflation in coming months,” said Auld.
ENTRENCHED INFLATION FEARS
Australian policymakers fear elevated oil prices could feed into broader price pressures in the economy and unmoor inflation expectations. Underlying inflation accelerated to a two-year high of 3.7% in the third quarter, after spending more than five years above the central bank’s 2% to 3% target band.
The policy tightening has been felt most acutely in the housing market, which is on track for its biggest downturn in four decades. The slump is expected to curb household spending through negative wealth effects and ripple across industries tied to housing turnover, from real estate agencies and conveyancing firms to removal companies.
The labour market has also softened, with the unemployment rate hitting a five-year high of 4.7%, but the central bank still judges it to be a little tight and a source of inflationary pressures.
Australia’s economy has slowed under the weight of higher borrowing costs, but not enough to ease inflation concerns, with a data centre investment boom continuing to fuel demand in an economy constrained by limited supply.
“In our view we are at, or close to, the cash rate peak and we are not forecasting another increase,” said Adam Boyton, head of Australian economics at ANZ.
“We suspect the risks might be skewed to marginally lower outcomes (in inflation), while the recent trend in the unemployment rate might see the RBA’s forecast peak of 5.1% reached sooner than it expects.”
(Reporting by Wayne Cole and Stella Qiu; Editing by Sam Holmes and Shri Navaratnam)
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