Australia's Stubborn Inflation Defies Rate Hikes

Australia's inflation rate remained stubbornly high in August, defying a series of interest rate hikes this year. The Reserve Bank of Australia (RBA) raised rates to a 15-year high of 4.6% on Tuesday, citing the need for further tightening to curb inflation expectations. Despite this move, the country's inflation print was slightly lower than forecast, with the Australian dollar slipping 0.2% to $0.6974 and three-year government bond yields falling 5 basis points to 4.925%. The quarterly trimmed mean measure of core inflation increased by 0.2%, leaving the annual pace steady at 3.6% for a third month.

The RBA has out-hawked many of its global peers, including the Federal Reserve and the European Central Bank, after three rate cuts in 2025 fueled domestic inflationary pressures. The US-Israeli war on Iran is pushing energy prices higher for longer, prompting policymakers to worry that inflation could become entrenched. Having hiked rates four times this year, RBA Governor Michele Bullock noted the long lags in monetary policy and said the central bank wanted to be more forward-looking and observe the economic impact of the rate hikes.

Market analysts are divided on the likelihood of another rate hike in November, with some arguing that it is a base case absent a lasting resolution of the Middle East conflict or other factors that lower energy-related costs. Westpac chief economist Luci Ellis said a November hike is now the base case, leaving the housing market and mortgage holders bearing much of the pain. The RBA has flagged housing as a downside risk to the economic outlook, with prices already down 8% in Sydney and 7% in Melbourne this year.