Australia raises rates for first time since late 2023 as inflation hits six-quarter high

• The 25 basis point hike to 3.85% matched economist expectations and follows six quarters of rising inflation
• RBA Governor Michele Bullock previously stated rate cuts were off the table 'for the foreseeable future' and indicated the bank would assess data meeting-by-meeting
• Australia's economy grew at its fastest pace in two years during Q3, expanding from a revised 2% in the previous quarter

Summary: Australia Raises Interest Rates Amid Rising Inflation

Key Development:

The Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 3.85% on Tuesday, marking its first rate hike since November 2023. The move met economist expectations and responds to inflation reaching a six-quarter high.

Policy Stance:

RBA Governor Michele Bullock has ruled out interest rate cuts for the foreseeable future, emphasizing the central bank's commitment to its 2.5% inflation target. Deputy Governor Andrew Hauser previously stated that near-term rate cuts are "probably very low" due to persistently high inflation. The RBA will evaluate future policy changes on a "meeting-by-meeting" basis, with further rate increases possible if inflation remains elevated.

Economic Context:

Australia's economy expanded at its fastest pace in approximately two years during the third quarter, growing from a revised 2% in the previous quarter. This acceleration, combined with stubborn inflation, has prompted the central bank's hawkish pivot after maintaining steady rates for over a year.

Market Implications:

The rate hike signals a shift in Australia's monetary policy trajectory, diverging from expectations of easing that had been priced into markets. Investors should anticipate a prolonged higher-rate environment, which will impact borrowing costs, consumer spending, and currency valuations. The RBA's data-dependent approach suggests volatility ahead as officials balance growth momentum against inflation concerns.

Sector Impact:

Higher rates typically pressure rate-sensitive sectors including real estate, consumer discretionary, and highly leveraged companies, while potentially supporting the Australian dollar and benefiting financial institutions through improved net interest margins.