The Reserve Bank of Australia faces a pivotal decision: whether to tighten policy further alongside the Federal Reserve and other global central banks while inflation remains above target and energy costs rise again, even as housing and labor markets show signs of cooling.

According to a survey of economists, markets expect the RBA to raise the cash rate by 25 basis points to 4.6% on September 29, the highest since November 2011. The bigger debate is whether another hike to 4.85% will be needed in November.

Factors supporting a tighter stance include stronger-than-expected inflation and growth data, and erosion of business confidence in the central bank's ability to restore price stability. Australian Bureau of Statistics data showed July headline CPI rose 3.5% year-on-year and trimmed mean inflation was 3.6%, both above the 2%-3% target range. While headline inflation eased from June, core inflation did not decline further.

So far, the cash rate remains at 4.35%, and this hike has not yet been delivered.

RBA Poised to Restart Hikes as Global High-Rate Pressure Builds

The Fed's return to hiking puts Australia's policy dilemma into a broader global rate repricing. Notably, the RBA embraced tightening earlier than the Fed and the Bank of Japan, raising rates by 25 basis points in February, March and May this year for a cumulative 75 basis points, lifting the cash rate from 3.60% to 4.35%. The Fed only restarted hikes on September 16.

The Fed had already raised rates by 25 basis points on September 16, bringing the policy rate range to 3.75%-4.00%. A Charles Schwab analysis on September 25 showed federal funds futures then priced in nearly three additional hikes through June 2027.

Long-term government bond yields reflect the expected path of future short-term rates plus term premium, so markets adjust long-term funding prices in advance even before central banks deliver further hikes. Schwab's analyst team, citing a New York Fed model, noted that this year's rise in 10-year U.S. Treasury yields mainly came from upward revisions to expected short-term rates rather than term premium, showing markets are reassessing how high and how long policy rates must stay to suppress inflation.

That repricing is already visible in long-end U.S. and Australian rates. During New York trading on September 25, 10-year and 30-year U.S. Treasury yields briefly hit about 5.23% and 5.53%, the highest since 2007 and 2004 respectively, before falling back to about 5.16% and 5.49%. On the same day, Trading Economics' aggregated over-the-counter interbank quotes showed Australian 10-year and 30-year yields at about 5.40% and 5.75%, up about 38 basis points and 18 basis points over the past month.

Long-end rates in both countries are under pressure from energy inflation and upward revisions to the policy path, but Australia also faces its own sticky core inflation and expectations of another hike.

From Pause to Re-Tightening? Patience With High Inflation Wanes, RBA Seen Restarting Hikes

As policymakers lose patience with persistently high inflation, the RBA is expected to restart hiking on Tuesday, while debate intensifies over whether further increases will be needed afterward.

According to a survey of economists, the RBA's nine-member monetary policy committee will raise the cash rate by 0.25 percentage points to 4.6% in a decision due at 2:30 p.m. Sydney time, the highest since November 2011. Against a backdrop of sharply rising global energy prices, traders are also pricing the end of the RBA's two-meeting pause.

Investors will closely watch the rate statement and Governor Michele Bullock's press conference an hour later. They will look for clues on whether the RBA is prepared to hike again in November for back-to-back moves, or prefers to stay on hold for the rest of the year.

Belinda Allen, head of Australian economic research at Commonwealth Bank of Australia, said: "Given the inflation backdrop, the risk is that further tightening is still needed after September. But making monetary policy more restrictive is not an easy decision."

As shown above, the RBA is expected to restart hikes, with several global central banks tightening in sync, and Australia may raise rates to 4.6% in September.

Signs of the RBA restarting tightening can be traced to its unexpectedly hawkish August meeting minutes. In those minutes, the divided policy committee listed three key data points to watch before the September 28-29 meeting: July monthly inflation data, with both headline and core above expectations; second-quarter GDP, with growth above expectations; and August employment data, with the unemployment rate rising for two consecutive months.

Based on that, two of the three data points moved in a direction unfavorable to cooling inflation. This run of stronger-than-expected data came alongside increasingly hawkish policy communication. Senior officials repeatedly stressed that their tolerance for persistently high inflation is very low and that they are willing to raise rates again if necessary. They also expressed concern about whether inflation expectations can return to the 2%-3% target range.

Bullock reminded a parliamentary committee that a view was starting to "emerge" in the business community that the RBA cannot bring CPI growth below 3%.

As shown above, Australia's inflation rate is clearly above the central bank's target—price growth has become the "top concern" before the RBA's September 28-29 meeting. Note: The dashed line represents the upper bound of the RBA's 2%-3% inflation target range. Source: Australian Bureau of Statistics

Robert Thompson of RBC Capital Markets said after Bullock's September 18 testimony that the policy signal from officials was so strong that "it leaves us with little doubt that insiders at the central bank have already made up their minds—a September hike is the necessary action." RBC expects another hike in November, taking the cash rate to 4.85%, the highest since November 2008.

The RBA acted aggressively earlier this year, raising rates at its first three meetings, and has kept rates at 4.35% since May. Most banks, including Commonwealth Bank of Australia and Goldman Sachs Group, expect the committee to tighten policy on Tuesday. ANZ, UBS Group and HSBC Holdings also expect the RBA to hike at two consecutive meetings.

As a result, Paul Bloxham, chief Australia economist at HSBC, expects a "hawkish hike" on Tuesday and said his forecast of two hikes would hit the economy. He said: "We expect this to stall growth from late this year into early next year, and we think recession risks are rising."

The Middle East conflict and the Russia-Ukraine conflict are also intensifying inflationary pressures in the global environment. Neither conflict appears likely to end soon, and both are pushing fuel prices higher. The artificial intelligence investment boom is also driving prices up. Major central banks are responding—the Fed, the Bank of Japan and the European Central Bank all raised rates over the past month, while the Bank of England warned that policy may need to be tightened.

As shown above, Australian fuel prices are accelerating—rising 16 cents in the past week alone, the biggest increase since mid-June.

The Organisation for Economic Co-operation and Development expects inflation in wealthy countries to persist through 2027 and warned central banks, including the RBA, to "stay highly vigilant" and intervene more forcefully than in the post-pandemic period. The International Monetary Fund this month also issued a similar direct warning to the RBA, urging it to be ready to raise rates.

Even before U.S. and Israeli strikes on Iran sent fuel costs soaring, Australia was already dealing with accelerating consumer prices. The country's inflation rate is among the highest in the developed world.

However, other factors suggest the RBA may not need to push rates as high as some more hawkish forecasts assume. Australia's housing market, closely tied to many parts of the economy, is in a downturn, and another hike could deepen it. Unemployment is also rising, and Commonwealth Bank of Australia's household spending insights data show spending is slowing broadly after previously proving resilient.

AMP economist My Bui said: "The current upward trend in the unemployment rate suggests that rate hikes are working, albeit very slowly." But she added that this "will not stop the RBA from raising rates further."