Key points
  • The Reserve Bank of Australia's monetary policy board is meeting to determine whether to raise Australia's cash rate
  • Markets and economists are widely tipping the cash rate to increase by 25 basis points to 4.6%
  • This would see the cash rate at its highest point in almost 16 years

The RBA's two-day meeting on the cash rate is underway in Sydney, with economists widely agreeing it will deliver a 25-basis point increase to 4.6% on Tuesday afternoon.

Markets are pricing in a 90% chance of a September hike which would be the fourth handed down so far in 2026 after increases in February, March, and May.

It would also deliver the highest Australian cash rate in almost 16 years.

At least one major bank - ANZ - has forecast it will be followed up by another increase in November while money markets are pricing in a rise in early 2027.

Some hawkish analysts are also speculating a third cash rate increase may be needed but that may be getting ahead of the game.

For now, the Reserve Bank has been consistent in saying the board will hike the cash rate if it sees upside risks to inflation in the economy and, to quote RBA Governor Michele Bullock, it appears "they are materialising".

Why are inflationary pressures increasing?

Chief among the factors fuelling inflation in the short-term are oil prices, now facing increasing pressure from intensifying conflict in the Middle East.

Essentially, Saudi oil supplies, which were able to bypass the contested Strait of Hormuz, had been keeping global oil prices relatively stable.

But an Iran-backed attack on Saudi facilities, including a key pipeline for global oil supplies, could see oil prices escalate unless a compromise is found.

That, of course, is out of the hands of the Reserve Bank which is tasked with two jobs: price stability and full employment, and only one tool with which to do them - the blunt instrument of the cash rate.

It's an economic tenet that higher fuel costs trigger a flow-on of price increases to goods and services throughout the economy as those costs are passed through to consumers.

The RBA's monetary policy board will decide whether to lift interest rates in a bid to douse demand for some of those goods and services and, as the theory goes, reduce those inflationary pressures.

AI boom also identified as inflationary risk

Another risk Ms Bullock has identified is the investment in AI which she has said is "putting pressure on the savings pool".

Construction of data centres is competing with growing home building demand, leading to labour shortages and escalating material costs.

This, in turn, adds to inflationary pressure with housing costs a key measure in the Consumer Price Index.

Coupled with government plans to reduce migration that may have helped ease labour shortages, the Reserve Bank will be wary of AI-fuelled inflation running too hot.

What has this got to do with mortgage holders?

Mortgage holders may well ask why they should carry the can for geo-political instability and AI investment over which they have little control.

In simple terms, a cash rate hike increases borrowing costs across the economy, cooling both consumer spending and business investment.

These can be good things for growing economies but, in the current climate, with historically low levels of economic productivity, too much of both serves to further fuel inflation.

The federal government believes AI will be the magic bullet in lifting productivity although if the RBA is trying to cool investment in data centres - well, you can see there are always competing interests.

What is the current rate of inflation?

The Reserve Bank will be using its own estimates in its September meeting with official inflation data for August only due the day after the cash rate decision is handed down.

Two of the big banks are tipping Australia's monthly headline inflation rate will come in at 4% or above on Wednesday while expecting the RBA's preferred measure of underlying inflation will remain unchanged at 3.6% from July.

The monetary policy board will be armed with the latest jobs data, however, which showed Australia's unemployment rate climbed to 4.6% in August, up from 4.5%.

This was largely driven by more people looking for jobs, the highest recorded movement into the labour force in recent years and likely in response to cost-of-living pressures.

The number of jobs created was also almost double market estimates at 39,500 new jobs in the month.

People in work also increases the amount of spending there is in the economy, another factor the RBA may not be entirely comfortable with despite its mandate of maintaining full employment.

One dataset the board will see before handing down its decision on Tuesday is the August household spending indicator released that morning.

The July print showed household spending growth at its fastest pace for almost three years which, at the time, supported the case for another cash rate increase even before external factors added fuel to the fire.

The Reserve Bank will hand down its cash rate decision at 2:30pm (AEST).

Savings.com.au will provide live blog coverage from 1:30pm.

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