Australia's central bank lifts rates to 4.6 per cent

On 29 September, the Reserve Bank of Australia did something that was beginning to look unfashionable. It raised the cash rate target by 25 basis points, to 4.60 per cent, the third increase of the year, and it did so unanimously. In a season when much of the developed world had been weighing when to ease, Canberra was pulling the other way, and the statement accompanying the decision makes the reasoning plain.

Inflation is the whole story. The board judged that recent inflation outcomes had come in stronger than expected, and that the upside risks flagged in August were now materializing. Two forces are doing much of the work. The first is oil: the conflict in the Middle East has broadened, global energy prices sit well above what the August forecasts assumed, and higher fuel costs have been partly passed through to the prices of other goods and services. The second is demand at home. Businesses, the central bank’s liaison suggests, are still facing cost pressures and are either raising prices or looking to. Short-term measures of inflation expectations remain elevated. On top of that, demand tied to artificial intelligence is pulling up the prices of technology goods worldwide, a tailwind that Australia’s trading partners have so far enjoyed more than its own shoppers have.

The decision is not without its tension. Growth in output has slowed, consumer spending is easing gradually, housing prices have fallen in most capital cities and new housing loans have dropped noticeably. That is not the textbook picture of an overheating economy. Yet the board concluded that the slowdown was not yet enough to take the pressure off prices, and that a further tightening was warranted to bring inflation back to target over a reasonable period. It also left the door open: the bank will do what it considers necessary, it said, including raising rates again if the data demands it.

What makes the move worth watching is not its size but its setting. Australia is a small, open, commodity-dependent economy, and its autumn dilemma is a distilled version of one facing many central banks right now. Oil prices driven by a distant conflict feed directly into domestic petrol costs and then into the wider price index. At the same time, investment tied to artificial intelligence is keeping growth in major trading partners stronger than expected, which props up Australia’s exports even as the bank restrains its own households. Monetary policy has to lean against imported inflation without choking a housing market that is already softening.

The risks run both ways and the statement is careful to say so. If the Middle East conflict drags on and oil supply is disrupted again, inflation could run higher while activity weakens. On the other side, weak productivity growth and the downturn in housing cloud the outlook for how much tightening the economy can absorb. The bank singled out productivity as the constraint that keeps capping how fast Australia can grow without reigniting prices.

For Australian households, the practical effect is another rise in borrowing costs on top of two earlier moves this year, at a moment when house prices are already cooling. For the rest of the world, the September decision is a reminder that the direction of travel is not as settled as the summer’s easing talk suggested. When energy prices and strong demand combine, even a cautious central bank finds itself raising rates again.

The board said it would remain attentive to the data and the evolving outlook. After three increases in nine months, with inflation still too high and oil still volatile, that patience looks likely to be tested well into the autumn.