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Cash rate reaches 12-year high

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Why did the cash rate rise? The Reserve Bank decided to raise the cash rate again on Tuesday, after keeping it unchanged since July.
Interest rates and inflation

The Reserve Bank of Australia has increased the cash rate by 0.25% to 4.35% — the highest it’s been since 2011.

It’s the first time since April that the Reserve Bank has raised the cash rate and the first rise under new RBA Governor Michele Bullock.

In a statement today, Bullock said that continual inflation (rising prices) drove the Reserve Bank to increase the cash rate.

The cash rate

The cash rate is what the RBA charges commercial banks for short-term loans. It flows through to other interest rates across the economy, so it’s often referred to as ‘increasing interest rates’.

There were 10 consecutive rate rises from May 2022 to March 2023, as the RBA moved to combat inflation (rising prices) by discouraging spending.

There were four consecutive pauses to the rate before today.

Fighting inflation

The Reserve Bank uses the cash rate to fight inflation (rising prices). Inflation peaked in December last year, when prices rose by 8.4% over the previous 12 months.

However, inflation has remained a persistent problem in the Australian economy. Prices were 5.4% higher in the 12 months to September 2023, a figure higher than what the Reserve Bank expected.

Inflation figures were a key consideration in the Reserve Bank’s decision.

Why did the cash rate rise?

Bullock said the declining of inflation had become “slower than earlier expected”, and that an increase would help ensure that inflation would fall within a “reasonable timeframe”.

The Reserve Bank wants inflation to fall to 2-3%.

They will meet to determine the cash rate for the final time this year in December. Any reduction to the cash rate isn’t expected until next year or 2025.

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