The Reserve Bank of Australia has raised the cash rate target by 25 basis points to 4.85 per cent, in a decision taken by its Monetary Policy Board and announced in early November. The previous target was 4.60 per cent.
The Board was divided. Six members voted to increase the cash rate target by 25 basis points, while three voted to leave it unchanged at 4.60 per cent. The Reserve Bank does not name individual members in the statement, so the split is reported as a count rather than attributed to named officials, and no further detail on the dissenting reasoning is given beyond the preference to hold.
The statement sets out an inflation picture that has not improved as the Board had hoped. Inflation is now expected to remain above 3 per cent for the coming year, which is a forecast rather than a reported outturn, and that expectation is the stated basis for acting. On the labour market, the statement says the unemployment rate has risen and is projected to rise by more than had been expected in the August forecasts.
That combination is the difficult part of the decision and it explains the three dissenting votes. A central bank raising rates into a labour market that is already loosening is accepting a cost in employment to bring inflation down, and the Board has now done so with a third of its members preferring to wait. For Australian businesses the practical reading is that the Reserve Bank has judged the inflation risk to outweigh the employment risk, and that the hurdle for a further increase is lower than a split decision might suggest.
The effect lands unevenly across the economy. Firms carrying floating rate debt see the increase pass through immediately, while households with mortgages face it over the following months as lenders reprice. Sectors that depend on discretionary consumer spending are therefore exposed twice, once through their own cost of capital and again through demand, and they are the same sectors that employ a large share of the workers the Board expects to see affected.
A cash rate target of 4.85 per cent is the highest the Board has set in this cycle. The statement gives no guidance on the next meeting, which leaves the question of whether this is the peak open.
