Published:
Statement by the Monetary Policy Board: Monetary Policy Decision
The RBA increased the cash rate target by 25 basis points to 4.60%, citing elevated inflation, materialising upside risks (including higher global energy prices from the Middle East conflict), and concerns about inflation expectations becoming embedded despite slowing growth.
The Reserve Bank of Australia decided at its meeting to increase the cash rate target by 25 basis points to 4.60%. In explaining the move, the Board said inflation remains elevated and that some upside risks flagged in August are now materialising.
The RBA attributed a key part of the renewed inflation pressure to the Middle East conflict, which it said has broadened and left global energy prices higher than assumed in the August forecasts. It also pointed to AI-related demand driving rapid growth in global prices for technology-related goods, and to domestic capacity pressures that are contributing to cost pressures. The Board noted that short-term measures of inflation expectations remain elevated and that recent Australian inflation outcomes were stronger than expected at the previous meeting.
On the growth side, the Bank said growth in output has slowed, but was stronger than expected at the margin in the June quarter. It also described signs that consumer spending growth is easing gradually, alongside housing weakness in many capital cities and a notable decline in new housing loans. Labour market conditions were said to have eased broadly as expected, while business investment and debt remain strong.
The statement emphasises that the Board is focused on preventing high inflation from becoming embedded, arguing that growth in aggregate demand needs to remain subdued for a period to bring inflation back to target. It also stresses heightened uncertainty around the domestic outlook, including scenarios with higher inflation and weaker activity, and says it will continue to do what it considers necessary, including further increases if needed.
Why this matters for FX
A higher RBA cash rate target and explicit justification for further tightening directly shifts Australian interest-rate expectations and financial conditions. The Bank links the tightening to (1) elevated inflation and elevated short-term inflation expectations, (2) pass-through from higher fuel prices, and (3) sustained upside risks from Middle East-related oil/energy disruptions. This is likely to affect AUD via relative yield expectations versus other currencies and through changes to risk premia tied to Australia’s domestic growth/inflation trade-off.