Is Australia Headed for More Rate Hikes? RBA Warns Inflation Is Still Too High

Source: Kapitales Research

Highlights:

• The Reserve Bank of Australia signalled it is ready to tighten policy further, with Deputy Governor Andrew Hauser warning inflation remains “too high” and must be brought back into the 2–3% target band.
• At the time of writing, the cash rate sits at 3.85% after a recent hike, while markets are pricing in a 70% chance of another increase to 4.10% in May, following stronger-than-expected inflation data.
• Strong credit growth, rising mortgage lending and a tighter labour market suggest financial conditions may not be restrictive enough, reinforcing the case for keeping rates higher for longer.

Australia’s central bank has delivered a clear warning to markets and households, signalling that interest rates could rise further as inflation remains stubbornly elevated and economic demand shows little sign of easing.

RBA Stays Firm on Inflation Fight

The Reserve Bank of Australia reinforced its hawkish stance after Deputy Governor Andrew Hauser said inflation was “too high” and policymakers were prepared to act decisively to bring it back under control. Speaking at a business lunch, Hauser stressed that the cost of allowing inflation to run hot was well understood and unacceptable. At the time of writing, the RBA’s cash rate stands at 3.85%, following a 25-basis-point increase last week, which reversed one of the rate cuts delivered in the previous year.

Markets Brace for Further Tightening

Financial markets are increasingly pricing in another move. At the time of writing, investors see roughly a 70% chance the cash rate will climb to 4.10% at the May meeting, pending the release of first-quarter inflation data. The central bank’s concerns were underscored by core inflation accelerating to 3.4% in the December quarter, the fastest pace in more than a year and above the RBA’s own forecasts. As a result, policymakers have lifted their projected peak for core inflation to 3.7% this year, well above the long-term target range of 2% to 3%.

Economy Pushing Against Capacity Limits

Hauser noted that while many sectors of the economy are performing well, overall growth is beginning to strain capacity, particularly in the labour market. The jobless rate dropped unexpectedly to 4.1% in December, its lowest level in seven months, signalling a possible renewed tightening in labour market conditions.

Credit Growth Signals Rates May Not Be Restrictive

Fresh data has added to the RBA’s concerns. Mortgage lending jumped 9.5% by value in the fourth quarter at the time of writing, following another strong increase in the prior quarter, while investment lending hit record levels. Combined with robust consumer spending and record-high home prices, these trends suggest financial conditions may still be too loose. For now, the message from the RBA is clear: the inflation battle is not over, and higher rates remain firmly on the table.

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