Reserve Bank of Australia tightens the screws, lifts rates again

In a widely tipped move, the central bank board decided to lift the official cash rate by 0.25 of a percentage point to 4.35 per cent - the 13^th increase since it began tightening monetary policy in May last year.

The rate increase, the first to be undertaken under the leadership of new governor Michele Bullock, ends a four-month hiatus when the RBA paused interest rates to assess the impact of the most aggressive tightening cycle in more than three decades.

While household spending has weakened significantly this year and there are signs of business activity beginning to slow, inflation remains well above the Reserve Bank's 2 to 3 per cent target range and conditions in the labour market continue to be tight.

Explaining the rate increase, Ms Bullock said that although inflation had passed its peak, "[it] is still too high and is proving more persistent than expected a few months ago".

The central bank governor said the RBA was particularly concerned about mounting charges for services, which were "continuing to rise briskly".

"Services price inflation has been surprisingly persistent overseas and the same could occur in Australia," she warned.

The RBA has updated its central economic forecasts and now expects it will take until the end of 2025 for annual inflation to slow to 3 per cent - around six months later than anticipated in August.

More positively, it has lowered its unemployment estimate and now expects the jobless rate to peak at 4.25 per cent rather than 4.5 per cent.

More detailed forecasts will be unveiled on Friday when the RBA releases its quarterly Statement on Monetary Policy.

Treasurer Jim Chalmers said this was "a difficult day for people with a mortgage".

"We do understand that Australians are already under substantial pressure in their household budgets, and this will tighten the screws further," Dr Chalmers said.

The Treasurer said providing cost-of-living relief was the government's highest priority and measures like energy bill rebates, 60-day prescriptions and childcare subsidies were helping contain bill increases without adding to inflation.

He also cited recent comments from the International Monetary Fund and Ms Bullock endorsing the government's fiscal strategy to bank most of last financial year's revenue windfall.

When asked, the Treasurer reiterated that although surging petrol prices have added to inflation and cost pressures, the government was not considering cutting the fuel excise.

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The consumer price index rose 1.2 per cent in the September, and underlying price pressures do not appear to be easing as quickly as the central bank would want. It had forecast trimmed mean inflation - which excludes volatile items like fuel and fuel - to drop below 3 per cent by mid-2025 but economists warned that on its current trajectory that appears unlikely.

In addition to concerns about stubborn services inflation, Ms Bullock warned that rising house prices, healthy savings and growing interest income could fuel spending by some households even as others were experiencing "a painful squeeze".

The rate hike has dismayed some, including Deloitte Access Economics chief economist Stephen Smith, who said it was the "rate rise the Australian economy didn't need".

"By slugging Australians with a rate hike this Melbourne Cup Day, the RBA has shown it has backed the wrong horse," Mr Smith said.

He said recent inflation had been driven by high global oil prices and rising rents rather than broad spending pressures and it was "hard to see what a November rate hike achieves other than making it harder for Australians to pay their mortgage in the lead-up to Christmas".

KPMG chief economist Brendan Rynne said although the rate rise was "not an unreasonable move", the central bank could have delayed a move until December.

Dr Rynne said there were signs that demand was weakening and the labour market was softening. In addition, an increase in the cost of finance on international markets was pushing up commercial interest rates even without any adjustment in the official cash rate.

"The economy is showing more signs that it is weakening because of past rate rises." he said, warning that "the rising cost ... associated with any cash rate rise is going to be disproportionately felt by the poorest in society - the cohort that are least adding to inflationary pressures in Australia".

Betashares chief economist David Bassanese the cruel irony of the situation was that the more households not affected by high interest rates kept spending, "the more RBA is forced to screw down on those that are affected".

Some economists think at least one more rate rise is likely, though any such move is expected to be delayed until early next year.

Mr Bassanese flagged the potential for a February hike if inflation during the December quarter remains "uncomfortably high".

Acting Opposition treasury spokeswoman Jane Hume blamed the federal government for the rate rise, accusing it of inflaming the nation's inflation problem by investing billions in infrastructure.

Senator Hume claimed the government had "its foot on the accelerator" at the same time the RBA was trying to cool the economy.

"The government took its eye off the ball and it hasn't got a plan to bring inflation down," she said.

The rate hike comes as other major central major banks have recently decided against tightening their policy settings.

The US Federal Reserve on November 1 held its target rate steady at 5.25 to 5.5 per cent and late last month the European Central Bank paused rates following 10 increases.

Internationally, inflation pressures are easing and the global economy is proving to be more resilient than many had been expecting.

The Reserve Bank board meets again on December 5 but there is then a two-month break before the first meeting of 2024 on February 5 and 6, when the central bank will begin operating under under a revised schedule of eight meetings a year, as recommended by the government's RBA Review.