Australia's Rate Rise Bites: Highest In 15 Years

The Reserve Bank of Australia has lifted interest rates to their highest level since 2011, and its governor admits the war in the Middle East has left Australians worse off. It is a sobering reminder that inflation is rarely beaten in a straight line.

The Decision

At the end of September, the RBA raised its main borrowing rate by 0.25 percentage points to 4.6 per cent. It was the fourth rise of the year, and higher fuel prices are feeding through into the cost of goods and services. The board's decision was unanimous.

The bank said inflation is still too high and that a further tightening was needed to bring it back to target in a reasonable period. It also said it would go further "if needed" to stop inflation becoming embedded. That puts rates at their highest since October 2011, when the European banking crisis was weighing on global growth.

A Cycle That Started Early

Australia was among the first countries to start raising rates in 2022 after the pandemic. This latest tightening cycle began in February, and economists expect it to run into next year. Governor Michele Bullock declined to say whether more rises are coming, only that the bank will watch the effects of its policy.

Markets took it calmly. The Australian dollar slipped 0.5 per cent against the US dollar, the S&P/ASX 200 was flat, and the yield on the 10-year government bond fell to 5.38 per cent.

"Made People Poorer"

Bullock was blunt about the cause. Excess demand and flat productivity had been pushing up prices, but the US and Israeli war with Iran added to the pressure through higher fuel, fertiliser and transport costs. "The Middle East conflict has made people poorer," she said. "That's a fact."

She was also careful not to put it all down to the war. She pointed out that the RBA started raising rates in February, before the conflict began, because demand was running ahead of supply. The oil shock, in her words, is making things much worse.

The Numbers Behind the Anger

Inflation has stayed above the RBA's 2 to 3 per cent target band since August. Consumer prices rose 3.5 per cent in the year to July, with housing costs up 5 per cent and food and drink up 3.2 per cent, according to the Australian Bureau of Statistics.

Bullock acknowledged the mood. "People are feeling, quite rightly, very annoyed," she said, pointing to rising living costs and weak real wage growth. That sort of candour from a central banker is unusual, and telling.

Housing Takes the Strain

Australian house prices have been falling, as higher rates and reduced tax breaks on investment property both weigh on demand. Property research firm Cotality said rising mortgage rates have steadily cut borrowing capacity, while consumer sentiment remains deeply pessimistic.

Its calculation is stark. Based on median household income, the four rate rises since February have cut borrowing capacity by almost A$90,000 (US$63,000). That is roughly a 9 per cent drop in purchasing power.

Real Pain for Borrowers

For those with mortgages, the hit is immediate. Canstar estimated that the latest rise adds around $107 a month to repayments on a $700,000 loan, taking the increase this year to $424 a month. Forty lenders, including all four major banks, have since passed on the rise, and plenty of borrowers are now paying more than 7 per cent on their home loans.

There is a small comfort. The RBA's latest Financial Stability Review says borrowers remain resilient overall, with arrears low and only about 2 per cent of variable-rate owner-occupiers short of cash after repayments and essentials.

Politics Heats Up

Treasurer Jim Chalmers told Australians to brace for difficult months ahead. He was defending the government against widespread criticism that heavy public spending has fuelled inflation. Emeline Gaske of the Australian Services Union called the rise heartlessness in the extreme. She said you cannot keep slugging workers with rate rises and treat unemployment as collateral damage.

Bullock said the bank is alert to, but not alarmed by, the prospect of higher borrowing costs as bond yields rise, adding that liquidity has not been an issue.

What It Means

This is the awkward corner central banks find themselves in. Supply shocks from a war are hard to fix with interest rates, yet inflation expectations cannot be allowed to drift. Households pay the price in the meantime, and the politics get harder with every rise.

For anyone watching Australian financial services, the signal is clear. Rates are staying higher for longer, property demand is weakening, and the pressure on lenders and borrowers is only likely to build.