Australia's central bank raises rates to 18-year high

Australia's central bank raised its cash rate to an 18-year high of 4.85% on Tuesday, marking its fifth increase of the year. The decision came after a 6-3 vote, indicating a potential shift in the central bank's approach to interest rates.

The Reserve Bank of Australia stated it would continue to take necessary actions to bring inflation back to target, but removed a previous reference to further rate hikes. This change was seen as a less hawkish signal by financial markets.

The Australian dollar fell 0.3% to $0.6977 following the decision, with markets increasing bets that the RBA will leave rates unchanged at its next meeting. There remains a 25% chance of an additional rate hike by early next year.

Governor Michele Bullock noted the uncertainty surrounding the next rate move, citing concerns from three dissenting members about downside risks, including a weakening housing market and rising unemployment. She emphasized the need to remain cautious about inflation risks.

Updated economic forecasts show inflation is expected to reach 4.5% in the fourth quarter before easing to the target range of 2% to 3% by the second half of next year. Unemployment is projected to exceed 5% within the next two years.

Despite the rate hike, the RBA's policy statement highlighted the ongoing need for tighter financial conditions to support the return of inflation to target. The central bank's tightening has reversed previous easing, placing Australia among the more hawkish central banks in developed markets.