Key Points
- The RBA has raised interest rates to address "three big risks".
- An economist says there are already indications of another rate raise at the board's next meeting in November.
The head of the Reserve Bank hopes the fourth rate rise of the year announced on Tuesday will turn the tide on the past six months of elevated inflation.
The RBA announced interest rates would rise to 4.6 per cent from 4.35 per cent and didn’t rule out a potential fifth rate rise this year in November to try to tame inflation.
"The hope here is that this will be restrictive enough," Michele Bullock told reporters on Tuesday afternoon. "Now, will it be enough? I don't know."
The rate rise follows six months of underlying inflation of around 3.5 per cent, above the board's target range of 2-3 per cent.
The RBA's mandate is to reduce inflation into this band, while protecting as many jobs as it can.
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'Three big risks'
In justifying the call to increase rates, Bullock said the effect of the first three rate rises this year are still flowing through.
However, "three big risks" have also started to materialise over this time.
"One was the Middle East conflict going on for longer and fuel prices rising again," she said, citing previous guidance which had predicted that oil and energy prices would have stabilised by now.
The second challenge, according to Bullock, is the "AI boom", which was adding to demand both in Australia and overseas, although she said the risk had not fully materialised.
This boom has partly driven up prices for technology-related goods.
Finally she said domestic capacity pressures were higher than anticipated, referring to an economic situation where too much money is chasing too few goods.
"It's difficult to estimate output gaps and how tight the labour market is," she acknowledged, explaining that inflation numbers and unit labour costs come into play.
The Australian Bureau of Statistics is due to release the latest inflation figures on Wednesday morning.
Will there be another rate rise this year?
Several key economic indicators will be released before the RBA meets again in November, giving policymakers more data to assess the inflation outlook.
However, major bank ANZ is already predicting interest rates will then rise to 4.85 per cent.
Betashares chief economist David Bassanese said there are already indications the board could hike rates again.
"For starters, the Board's decision was unanimous. The Board also explicitly warned that it may raise rates again if needed," he said in a statement.
"Ominously, the Bank noted that local firms are facing higher costs and are either raising prices or "looking to do so". This suggests that inflation could rise even further in the months ahead."
Bullock declined to predict what the board would decide at its next meeting in November, saying the RBA will do what it has to do to reduce inflation.
"But if we can avoid massive job losses and a massive increase in the unemployment rate, that is a really important thing to be able to try and do."
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