RBA Minutes Reveal Three Reasons for 4.60% Rate Hike, Further Increases on Table

The minutes were hawkish, not unexpectedly, and the board explicitly signalled that further rate increases remain on the table, and markets have already priced in roughly 15 basis points by year-end and 30 basis points in the first half of 2027. Oil is central to the outlook: domestic fuel prices were well above the level the RBA assumed in August, and any further escalation of the Iran war could feed into more tightening. The board's concern that a slow-moving RBA could weaken the Australian dollar implies a willingness to keep pace with other central banks, which should support the currency against rising global yields. Rate-sensitive sectors such as banks, property and consumer discretionary goods remain exposed, given falling house prices and the board's view that household spending must stay subdued for some time.

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The RBA has determined that the economy is running hotter and the neutral rate is higher than previously assessed. In central bank language, that means “we may not be done yet”.

Key points from the minutes:

• At its 28-29 September meeting, the Reserve Bank of Australia board unanimously backed a 25-basis-point cash rate rise to 4.60%.
• Members reported that all three upside inflation risks outlined in August had materialised or were building: a broader Middle East conflict pushing up oil prices, cost pressures from the global AI boom, and tighter domestic capacity than assumed.
• Staff increasingly question whether the unemployment rate consistent with target inflation is higher than once thought, implying more excess demand; unemployment was 4.6% in August.
• The board said a possible increase in the global neutral rate meant the previous 4.35% cash rate was less restrictive than it had been two years earlier, and that staying still could weaken the Australian dollar.
• Members accepted slower growth in demand and jobs as the price of returning inflation to target, and indicated they would raise rates further if needed.
• On financial stability, the board flagged rising global risks from bond markets and the potential for abrupt repricing of AI-related assets, while judging Australian borrowers to be resilient.

According to minutes of the 28-29 September meeting released on Tuesday, the Reserve Bank of Australia raised rates last month because several of the upside inflation risks it had flagged in August had materialised or were building. The board signalled it was prepared to tighten further if necessary.

The board unanimously voted to lift the cash rate by 25 basis points to 4.60%. Members said the August forecasts, which had inflation returning to the midpoint of the target range by about late 2027, depended on a series of favourable developments that now appeared unlikely to all occur.

The minutes set out three main reasons for the move. First, the risks identified in August had largely eventuated. The Middle East conflict had widened and oil prices were well above the level assumed in the forecasts, with domestic petrol and diesel prices running about 13% higher than projected. Global cost pressures were intensifying, driven partly by extraordinary demand for AI-related products, and domestic capacity looked tighter than assessed. Second, members judged that a rapid response would best balance their inflation and employment goals, given that inflation has been above target for some time and surveys point to a risk that business inflation expectations are rising. Third, the board stated that the cash rate might be insufficient to restore balance within a reasonable timeframe even if the risks did not fully eventuate.

This last point reflected a meaningful change in views on the neutral interest rate—the rate at which policy neither boosts nor slows the economy. Members noted that if market signs of a higher global neutral rate were accurate, the earlier 4.35% cash rate was less restrictive than it had been two years earlier. They also said that if the RBA remained stationary while other central banks tightened, Australian financial conditions could ease via a weaker currency.

On the economy, the board noted that June quarter growth was slightly above expectations, driven by business investment that rose more than 10% over the year, partly reflecting data centre and renewable energy construction. Household consumption slowed to a below-trend pace, house prices fell faster than expected, and unemployment rose to 4.6% in August. Staff increasingly questioned whether the unemployment rate consistent with target inflation is higher than previously assumed, which would mean more pressure on capacity than estimated. Growth in unit labour costs, driven by weak productivity rather than robust wages, also remained above levels consistent with the target.

Members acknowledged that the trade-off between inflation and employment had worsened because of global cost pressures, and that returning inflation to target would require accepting slower growth in demand and jobs. The board will monitor incoming data closely and said it will take any necessary action, including further increasing the cash rate if needed.