Australia's central bank raises rates to 15-year high, flags more hikes

Australia's central bank raised its cash rate to a 15-year high of 4.60% on Tuesday, its fourth increase this year, and said it was prepared to tighten further if needed to bring inflation back to target.

The Reserve Bank of Australia's board voted unanimously to lift rates by 25 basis points at its September policy meeting, taking the total tightening this year to a full percentage point. The decision was widely expected, and the Australian dollar was little changed at $0.7014 after the announcement. Markets are pricing a 43% probability of another rate rise in November.

In its statement, the board said some upside risks to inflation were materialising, pointing to fresh disruptions to global oil supply and data suggesting growth and inflation in Australia had run higher than expected. It said it would continue to do what it considers necessary to return inflation sustainably to target, including raising the cash rate further if required.

Markets had fully anticipated the move after inflation came in hotter than expected in July, oil prices surged again amid few signs of a resolution in the Gulf conflict, and policymakers repeatedly warned that inflation risks could be building. Brent crude has climbed nearly 20% since the RBA last met in August, threatening a broadening of price pressures. Headline inflation is expected to have risen back to 4.1% in August, above the central bank's 2% to 3% target band, while underlying inflation likely held at 3.6%, according to data due on Wednesday.

A data centre investment boom, estimated by Westpac to be worth as much as A$175 billion ($122.8 billion), is adding to domestic demand. RBA Deputy Governor Andrew Hauser recently returned from the United States more concerned about inflation after seeing the AI-driven investment frenzy firsthand.

The RBA's 100 basis points of tightening this year has more than reversed the 75 basis points of policy easing from 2025, leaving Australia ahead of much of the developed world. The US Federal Reserve this month delivered its first rate hike in more than three years, while the European Central Bank has raised rates twice this year.

Australia's economy has slowed amid higher borrowing costs, but not enough to dispel inflation concerns. Annual growth was 2.1% in the second quarter, above the 2% speed limit the central bank considers sustainable without generating inflation. Household spending was flat in August after a strong three-month run, but the annual rate remained robust at 6.8%. The labour market is gradually easing but was still judged tight by the RBA. Employment growth exceeded expectations in August, while the jobless rate edged up to 4.6% only because more people entered the workforce.