Reserve Bank of Australia issues Melbourne Cup day cash rate hike as inflation bursts out of the gate

One favourite has already come good on Melbourne Cup day after the Reserve Bank of Australia (RBA) raised its cash rate target 25 basis points to 2.85%.

The central bank revealed its seventh consecutive monthly uptick on Tuesday afternoon, as the institution attempts to curb runaway inflation by reducing consumer demand.

“As is the case in most countries, inflation in Australia is too high,” RBA governor Philip Lowe said in a statement.

“Over the year to September, the CPI inflation rate was 7.3%, the highest it has been in more than three decades.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”

All told, the central bank now expects inflation to peak near 8% this year, before the most significant international constraints on supply ease over the next year, lowering domestic inflation to “4.75% over 2023 and a little above 3% over 2024.”

Tuesday’s cash rate rise marks the second 25 basis point adjustment in a row after the RBA eased off its streak of 50 basis point hikes.

In October, Lowe says the RBA decided not to continue its 50 basis point run as the full effect of those sharp rate hikes was yet to be observed on household spending levels.

That “wait and see” approach is still in play, Lowe said Tuesday.

“The board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments.”

Tuesday’s 25 basis point adjustment was predicted by banks including ANZ, joining the 35 out of 39 economists and market-watchers surveyed by Finder ahead of the official print.

One outlier was Westpac, whose economics team called the latest inflation data a “major surprise” likely to cause the RBA to return to its pattern of 50 basis point cash rate increases.

“Not responding firmly to this genuine shock would risk the impression of a central bank that is less than fully committed to the inflation task,” the bank said.

For its part, the RBA says it is still keenly watching inflation levels, reiterating that further increases are likely on its crusade against the surging cost of living.

“The board expects to increase interest rates further over the period ahead,” it said.