RBA delivers another hike in split decision

The Reserve Bank of Australia (RBA) lifted the official cash rate yesterday by 25 basis points to 4.85%, in line with expectations.

Despite the hike being priced in by markets, the RBA noted the decision to lift interest rates was not unanimous, with a six to three split vote.

RBA governor Michele Bullock noted in the press conference those who voted to hold the cash rate steady weighted the downside risks to growth, housing, labour market greater than the upside risks to inflation.

"The argument also centred on waiting for more information given the rate hikes already delivered and the lags of monetary policy. But clearly there are some members who are worried that the breaking point of the economy is getting closer. This is a surprise given the discussion last meeting of inflation being the board's top priority," Commonwealth Bank head of Australian economics Belinda Allen said.

"The post meeting statement dropped the recently used line of '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' and replaced it with 'the board will continue to do what it considers necessary to bring inflation sustainably back to target'.

"We judge the shift in language retains the same meaning but after five rate hikes monetary policy is better placed to watch the flow of data from now but the willingness to hike again is retained."

Allen said she expects the RBA to remain "on edge" for the remainder of the year but will likely keep rates on hold.

"We continue to pencil in two rate cuts in late 2027, in August and November, which would bring the cash rate down to 4.35%," she said.

However, Betashares chief economist David Bassanese said it is still too soon to be definitive about whether the current cash rate of 4.85% will be enough to temper inflation.

"In terms of external forces, both the Iran war and the AI boom seem likely to remain upside inflation risks for the foreseeable future. In bittersweet news, the best hope of a near-term slowing in inflation rests on weaker local economic growth, which higher interest rates are slowly but surely helping to bring about," Bassanese said.

"In fact, two further rate hikes in the first half of next year can't be ruled out to ensure a decent slowing in domestic demand and containment of inflation expectations. My base case is the RBA will raise rates again in February 2027.

"At the least, having now raised rates in both September and November, the RBA will likely feel able to leave rates on hold at the last policy meeting of the year next month - offering under-pressure households at least a Christmas reprieve."