Australia hikes interest rates to 18-year high

(Sharecast News) - Australia's central bank hiked interest rates to their highest level since 2008 on Tuesday, its fifth rise this year, as it looked to tackle mounting inflation. The Reserve Bank of Australia voted by a majority of six to three to increase the cash rate target by 25 basis points to 4.85%.

In the accompanying notes, the bank argued that inflation remained both elevated and broad based. "This partly reflects higher fuel and other commodity prices affected by the conflict in the Middle East. But domestic capacity pressures are also judged to have been a little tighter than earlier thought," it said.

It also flagged artificial intelligence-related investment, which was driving "rapid" growth in prices for technology-focused goods.

As a result, the RBA does not now expect inflation to reach its target range of 2% to 3% until towards the end of 2027, later than previously forecast. Inflation currently stands at 4.3%, or 3.6% once more volatile elements such as fuel are stripped out.

As well as sticky inflation and rising interest rates, the Australian economy is also battling high unemployment and a collapse in house prices. RBA governor Michele Bullock told reporters after the rate decision: "I know this is not the news many Australians wanted to hear, but it is what is needed."

However, many commentators believe the bank will be reluctant to raise rates again.

Lee Hardman, analyst at MUFG Research, said: "While [Bullock] has not completely ruled out the possibility of another hike, there is a higher hurdle which fits with our view that the policy rate is now close to a peak.

"We expect the RBA to keep rates on hold in December, and then the following policy meeting is not until February, giving the RBA more time to assess how the economy is responding to higher rates and whether further hikes are needed to bring inflation back towards target.

"Bullock emphasised that the impact of the latest hikes on the economy have yet to be felt."