Interest rates at highest level in 15 years

The monetary policy board of the Reserve Bank of Australia (RBA) unanimously agreed to increase the interest rate by 25 basis points to 4.6%, the highest level since 2011.

The RBA said the hike was a result of inflation remaining "elevated" and risks flagged previously are now materialising, as well as further disruptions to global oil supply passing through to prices of other goods and services.

The RBA noted the effects of previous interest rate hikes have started to be seen in the economy.

"There are signs that growth in consumer spending is easing gradually as expected, although housing prices have fallen in most capital cities and new housing loans have declined noticeably," the RBA said.

"Labour market conditions have eased broadly as expected in recent months, and labour market leading indicators are broadly stable. Meanwhile, growth in business investment and debt is strong."

The recent interest rate hike from the Federal Reserve and unemployment data also contributed to the announcement. The central bank said it will continue to tame inflation "sustainably" but left the door open for more potential hikes.

"The board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed," the RBA said.

"Accordingly, the board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. Monetary policy is well placed to respond to developments, and the board is focused on its mandate to deliver price stability and full employment."

Additionally, the RBA also signified the heightened investment into artificial intelligence (AI) as a driver to "rapid growth" in global prices for technology-related goods, while pressure remains for domestic capacity with most businesses experiencing cost pressures "are either increasing the prices of their goods and services or looking to do so."

Commenting, J.P. Morgan Asset Management global market strategist Kerry Craig said the RBA has "struck a distinctly hawkish tone" with the move.

"Back in August, the RBA made clear that persistent inflation would be the trigger for higher rates, and July's CPI release crossed that line. Now, the RBA maintains a tightening bias, noting further hikes are possible 'if needed', but is less explicit about what would prompt another increase," Craig said.

"Notably, the September statement dropped the reference to policy being 'somewhat restrictive', signalling a willingness to let the economy endure a period of 'subdued' economic activity to ease capacity pressures and prevent inflation from becoming entrenched."

He noted despite the move, market reaction was relatively muted.

"For now, the burden of proof is on incoming data, especially near-term inflation expectations, to provide relief and show that the RBA's fear of embedded inflation expectations will materialise. Without softer numbers, another rate hike in November remains firmly on the table," he added.

Meanwhile, State Streets Markets head of Asia Pacific macro strategy Dwyfor Evans said the hike means consumers will continue to face cost-of-living pressures, negative real wage growth, and a softer labour market.

"RBA comments were largely centred on global energy prices, their rise compared to August assumptions and inflation pass-through. The unanimous decision to hike and comments around elevated inflation will further pressure rates to the upside ahead the early November meeting, particularly if energy prices remain high," Evans said.

PIMCO managing director and head of Australia portfolio management Adam Bowe added: "While the bank has kept the door open to further tightening, we expect that the trade off between growth and inflation will become more challenging from here. Slowing growth momentum, a rising unemployment rate, and a weakening housing market suggest a cautious approach to policy into year end."

"Market pricing continues to imply a higher terminal policy rate and a longer period of restrictiveness than our central scenario. With economic cracks emerging, a moderating fiscal impulse, and strong demand for Australian dollar denominated bonds, we view Australian duration as attractive at current levels."