Background: The Reserve Bank of Australia (RBA) is the country's central bank - effectively the control centre for interest rates that influence mortgages, loans, and savings. Back in 2022, the RBA faced heavy criticism for being too slow to raise rates during the inflation spike... something it's clearly trying not to repeat.

What happened: The RBA has increased the cash rate for the third time in a row, raising it by 25 basis points to 4.35%. And this wasn't a close decision either. The board voted 8 to 1 in favour of the hike.  

What else: While other major central banks like the US Fed, Bank of England, and European Central Bank are pausing, Australia is going the other way. That's because inflation is still running hot, with the RBA now forecasting it to reach 4.8% (up from an earlier estimate of 4.2%) ... driving the central bank to double down on tightening monetary policy.

What's the key learning?

💡Monetary tightening is when a central bank raises interest rates to cool spending... to slow borrowing... with the goal of bringing inflation down.

💡Rate hikes follow a global playbook, but with different intensity. Higher borrowing costs slow spending and investment, but each country moves differently:

• During 2022-2023, the US Fed hiked rates from 0.25% to 5.5% over 16 months.
• In Australia, we only reached a peak of 4.35%... which is where we are again now.

‍

💡But the impact isn't immediate, and that's the challenge. Rate changes take 12-18 months to flow through, meaning the RBA is making decisions without seeing the full effect yet.