RBA raises interest rates to 2008 levels, sees more hikes to ward off inflation

 The Reserve Bank of Australia raised interest rates to a 18-year high on Tuesday and warned that more monetary tightening could be required to ward off increasingly sticky inflation.

The RBA hiked its cash rate target by 25 basis points to 4.85%, in line with market expectations. The decision was not unanimous, with three of the RBA’s nine-member rate-setting board voting in favor of a hold.

The cash rate is now at its highest level since late-2008, where the RBA had aggressively hiked rates in the wake of the global financial crisis. 

Tuesday’s hike is the RBA’s fifth such move this year, and comes as the central bank struggles to quash sticky Australian inflation. A mix of higher energy prices– due to the Middle East conflict– plus strong domestic demand and artificial intelligence investment drove Australian consumer price index inflation to near three-year highs this year.

Core inflation, as measured by trimmed mean CPI, also sat well above the RBA’s 2% to 3% target range. 

“Given the revised inflation outlook and the continuing upside risks, the Board judged that a further tightening in financial conditions is warranted to support the return of inflation to target,” the RBA said in a statement. 

“Monetary policy is well placed to respond to developments, and the Board is focused on its mandate to deliver price stability and full employment.”

The central bank forecast that inflation is now expected to remain above 3% in the coming year, and flagged increasing risks that higher inflation expectations will become embedded– a scenario the RBA has constantly warned against. 

RBA Governor Michele Bullock had last week told lawmakers that inflation remained too high and was likely to remain lofty in the coming months. She had raised the prospect of more rate hikes to cool runaway prices.