Prime Highlights:
- The Reserve Bank of Australia (RBA) has increased the interest rate by 0.25% to 3.85%, its first hike since November 2023.
- Inflation reached a six-quarter high, but the economy continues to grow steadily, showing strong domestic demand and resilience.
Key Facts:
- Consumer prices rose 3.8% in December, up from 3.4% in November, with housing costs, especially electricity, being the main contributors.
- Experts say businesses and consumers should prepare for higher borrowing costs, even as the economy remains strong.
Background:
Australia’s central bank has lifted its interest rate by 0.25% to 3.85%. This is the first time rates have gone up since November 2023, as inflation reaches its highest level in six quarters.
Experts had predicted the increase, after reports showed that consumer prices rose 3.8% in December, up from 3.4% in November. Higher housing costs, especially electricity bills, were the main drivers of inflation after state electricity rebates ended.
The RBA said the rate hike was due to stronger-than-expected demand, a tighter job market, and increasing pressure on the economy’s capacity. The board voted unanimously, signaling a shift after delivering three interest rate cuts in 2025.
“Inflationary pressures picked up materially in the second half of last year,” the RBA said, noting that prices are expected to remain above the bank’s target band well into next year before gradually easing.
Moody’s Analytics head of Australia economics, Sunny Nguyen, described the situation as a “double-edged sword” for the central bank. While global economic resilience and export momentum from East Asia, driven by the AI boom, support domestic growth, these factors have also limited the natural cooling of an already heated economy.
Reserve Bank officials, including Deputy Governor Andrew Hauser and Governor Michele Bullock, have said that interest rates are unlikely to be cut soon. Bullock added that any future changes will depend on inflation and other economic data, which the bank will review at each meeting.
The announcement comes as Australia’s economy continues to grow steadily. GDP rose 2.1% in the third quarter, up from a revised 2% in the previous quarter, marking the fastest growth in nearly two years.
Inflation is still above the RBA’s 2.5% target, so the central bank is working to keep the economy stable and prices under control. Experts say businesses and consumers should expect higher borrowing costs, even though the economy is doing well.