(Bloomberg) -- Australia’s central bank resumed raising interest rates on Tuesday in a widely anticipated move, while signaling a higher hurdle to further policy tightening that pushed the local currency lower.

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The Reserve Bank increased its cash rate to a 12-year high of 4.35% and revised up its inflation forecast slightly to 3.5% by end-2024. It also edged down the predicted peak in unemployment to 4.25%, underscoring the resilience in the broader economy to the central bank’s tightening so far.

“The board judged an increase in interest rates was warranted today to be more assured” of inflation returning to target, Governor Michele Bullock said in her post-meeting statement. “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

Bullock’s tempering of the RBA’s tightening bias sent the Aussie dollar down 0.8% to 64.37 US cents at 5:02 pm in Sydney, and the policy-sensitive three-year government bond yields fell 3 basis points to 4.24%.

“Today’s softer tightening bias — against the backdrop of the RBA’s consistent reluctance to hike this cycle — reinforces our view that rates will now remain on hold,” said Andrew Boak, chief economist for Australia and New Zealand at Goldman Sachs Group Ltd. “However, ultimately it will be data dependent.”

Australia’s benchmark stock index dropped as much as 0.7% in the aftermath of the rate hike, but quickly pared its losses to close down 0.3%.

The RBA is the only developed-world central bank to raise rates since September after third-quarter inflation came in stronger than expected, suggesting it had more work to do to restrain prices.



“The RBA’s decision stands in contrast to the recent decisions of the FOMC, ECB and Bank of England to hold rates,” said Luci Ellis, chief economist at Westpac Banking Corp.

“At a deeper level, though, all of these central banks are facing similar decisions,” said Ellis, a former RBA assistant governor. “Each central bank is watching the data unfold for signs that they need to do more.”

Inflation is now only expected to hit the top of the RBA’s 2-3% target by end-2025, from its previous forecast of 2.8%, forcing it to keep open the door to further tightening. By contrast, the Federal Reserve is seen cutting rates next year with the latest US data showing a rise in unemployment.

While the RBA’s central forecast is for inflation to continue to ease, “progress looks to be slower than earlier expected,” Bullock said, adding that data in recent months “suggests that the risk of inflation remaining higher for longer has increased.”

The central bank will release its full suite of forecasts on Friday in its quarterly Statement on Monetary Policy.

While most economists see the RBA as having now reached its peak rate, National Australia Bank Ltd and Royal Bank of Canada are among a handful predicting at least one more hike.

“Given the revisions to the outlook, we expect the board to form the view that a single 25 basis-point adjustment to rates is not enough to mitigate the risks on inflation – seeing a further rise, most likely in February,” economists at NAB wrote in a research note. They added that the next move could come as soon as December.

Australia has tightened at a slower pace than global counterparts, having raised rates by 4.25 percentage points compared with 5.25 points in New Zealand and the US.

The RBA’s cautious approach reflects its desire to bring the economy in for a soft landing. Bullock and her colleagues are also mindful of the impact of tightening on Australia’s highly geared borrowers who are overwhelmingly on variable rates, unlike the US where most mortgages are fixed for 30 years.

What Bloomberg Economics Says...

“The hike will damp an already softening economy, and the data over the rest of 2023 and early 2024 will probably shift the discussion around policy toward how soon the RBA begins reversing course”

“We think Australia’s rates cycle is now over, and the next move is down”

— James McIntyre, economist.

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Data on the economy has been mixed lately. The housing market has rebounded to near record highs, retail sales rose by more than anticipated and business confidence is still proving resilient. Also helping the economy is surging population growth that’s boosting demand for everything from housing to transport and dining out.

On the flip side, consumer sentiment is in the doldrums while the country’s tight labor market is beginning to show signs of loosening, with economists predicting the jobless rate will soon rise from the current ultra-low 3.6%.

Bullock has acknowledged the path to cooling inflation while preserving employment gains is a “narrow” one. Her determination to stay on that path is one reason why economists expect Australia will avoid a recession.

--With assistance from Garfield Reynolds.

(Adds economists predicting another rate hike.)

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