The Australian Treasurer warns of rising costs of living after raising interest rates to the highest level in 15 years

Australian Treasury Minister Jim Chalmers said on Tuesday that Australian families are facing increasing pressure, warning that the central bank raising interest rates to the highest level in 15 years will make conditions more difficult for many citizens.

Chalmers said in a post on the “X” platform following the central bank’s decision to raise the main interest rate by 25 basis points to 4.6 percent: “We know that many Australians are facing pressure, and this will make things more difficult.”

His statements came after the Reserve Bank of Australia raised interest rates for the fourth time this year, by a total of 100 basis points, in an attempt to curb inflation, which is still well above the target range between 2 and 3 percent.

The central bank kept the door open to further increases, saying that some risks of rising inflation had begun to materialize, in light of additional disruptions in global oil supplies, and data showing that growth and inflation in Australia were higher than expected.

Increased fuel costs are expected to push headline inflation to 4.1 percent in August, compared to 3.5 percent in July, while core inflation is likely to remain at around 3.6 percent.

The rate increase comes at a time when the Australian economy is still growing at a consistent pace, with annual growth reaching 2.1 percent in the second quarter, while household spending remained strong, recording annual growth of 6.8 percent in August.

But rising borrowing costs are adding pressure on households, especially borrowers, at a time when living and energy costs remain high.

The central bank also faces the challenge of rising domestic demand associated with investments in data centers and artificial intelligence. Westpac estimates the value of potential investments in data centers in Australia at up to 175 billion Australian dollars, which may add pressure on demand and prices.

Tuesday's decision indicates that the central bank is placing containing inflation at the top of its priorities, even as the government is aware of the impact of high borrowing costs on families and economic activity.

The dollar stabilized near its highest level in two months on Tuesday, supported by a rise in US Treasury bond yields and a rise in oil prices, but its gains remained limited as investors awaited US economic data this week in search of indications on the path of interest rates at the Federal Reserve.

The dollar index, which measures the performance of the US currency against a basket of major currencies, rose slightly to 101.2 points, heading for monthly gains of 1.8 percent, which will be the strongest since June.

The euro settled near its lowest level in three months at $1.1367, after the head of the European Central Bank indicated that calculated steps were being taken to contain inflation, while the pound sterling settled at $1.3248, near its lowest levels in three months.

In energy markets, oil prices rose again, with Brent crude trading near $106 a barrel, as markets doubted the ability of renewed efforts to end the war in Iran to achieve progress, after US President Donald Trump rejected an Iranian ceasefire proposal.

At the same time, the continuing wave of selling in US Treasury bonds pushed yields to new highs. The 10-year bond yield reached its highest level since 2007, while the 30-year bond yield reached its highest level since 2004, while the two-year bond yield, which is more sensitive to monetary policy expectations, rose to its highest level in more than two years, approaching 5 percent.

Joseph Capurso, head of foreign exchange research at Commonwealth Bank of Australia, said that the dollar's gains are still limited as investors await US data later in the week, noting that markets have become less sensitive to oil movements, while the global wave of selling in bonds has limited the usual positive impact of rising Treasury yields on the US currency.

He added that the release of stronger-than-expected US economic data may reinforce the belief that the US economy is still more robust compared to other economies, which may push US interest rates and the dollar higher.

Markets are awaiting the release of a set of US data, led by the personal consumption expenditures price index on Wednesday, and the non-farm payrolls report on Friday, amid expectations that the data will support continued monetary tightening and raise interest rates.

Markets are currently pricing in a probability of more than 70 percent that the Federal Reserve will raise interest rates at the end of October, up from 57 percent a week ago, according to the CME Group's Fed Watch tool.

In Australia, the Reserve Bank of Australia is expected to raise its key interest rate later, while the Australian dollar and New Zealand dollar fell 0.1 percent to $0.7013 and $0.5660, respectively.

The Japanese yen fell slightly to 157.40 against the dollar, giving up part of its gains recorded on Monday, after Atsushi Mimura, Japan's chief currency official, said that the markets should take into account the "very clear" warning issued by Tokyo and Washington last week regarding the weakness of the yen, which kept traders on alert for the possibility of authorities intervening in the exchange market.

The Chinese yuan traded outside the country stabilized at 6.71 against the dollar, after the three-day summit between Trump and Chinese President Xi Jinping last week produced limited results.

The Australian Central Bank raised interest rates by 25 basis points to 4.6 percent, their highest level in 15 years, continuing to tighten monetary policy in the face of inflation that is still above target, at a time when the repercussions of the war in the Middle East are increasing pressure on energy prices.

The increase, which was expected by economists polled by Reuters, brought the central bank to raise interest rates for the fourth time this year, for a total of 100 basis points, with inflation continuing above the target range of between 2 and 3 percent.

Inflation reached its highest level this year at 4.6 percent in March, before falling to 3.5 percent in July, but it was higher than market expectations. Inflation data for August is scheduled to be released on Wednesday.

The Australian Central Bank said at its previous meeting that inflation “is still very high,” pointing to continued domestic price pressures and high energy costs related to the war with Iran.

An analysis by Bank of America last week showed that inflation is accelerating instead of approaching the central bank’s target, considering that consumer price data in July constituted the clearest indication of this shift, in light of the rise in core inflation in recent months.

The bank added that there are indications that the increase in energy costs is being transmitted to other prices, which enhances the risks of inflation becoming entrenched for a longer period.

On the other hand, the central bank warned of a slowdown in growth as borrowing costs rise. The Australian economy grew 2.1 percent in the second quarter on an annual basis, compared to 2.5 percent in the first quarter.