The Central Bank of Australia raised interest rates on Tuesday, to their highest levels in 18 years, the fifth increase since the beginning of the year, but the division of board members regarding the decision, by six votes to three, strengthened expectations that the end of the monetary tightening cycle was approaching.
At the conclusion of its November meeting, the bank raised the key interest rate by 25 basis points to 4.85 percent, stressing that it would continue to take the measures it deems necessary to return inflation to its target levels. But he omitted from his statement an explicit reference to the possibility of further increases in interest rates if necessary, according to Reuters.
This less stringent shift in the bank's tone was quickly reflected in the markets, as the Australian dollar fell, while investors' bets on keeping interest rates unchanged at next month's meeting strengthened. The Australian dollar fell 0.3 percent to $0.6979, while three-year government bond futures fell four points to 95.13 points.
30 out of 32 Economists polled by Reuters had expected to raise interest rates, while the markets were pricing in an 88 percent probability of taking this step, following the release of data showing a sharp rise in inflation during the third quarter, along with tough statements from bank officials, which overshadowed fears of the unemployment rate rising to its highest levels in five years.
The bank’s board of directors said in a statement, “The revised inflation expectations and the continued risks that push it to rise led the board to consider that additional tightening of financial conditions has become necessary to support the return of inflation to its targeted levels.”
He added that the Council “will continue to take what it deems necessary to return inflation sustainably to the target level.”
The total increases approved by the bank since the beginning of the year amounted to 125 basis points, which fully offset the increase in monetary easing of 75 basis points during 2025, and placed Australia among the most stringent central banks in advanced economies. On the other hand, the US Federal Reserve kept interest rates unchanged during its meeting this month, while the Reserve Bank of New Zealand surprised the markets with its decision to stop raising interest rates, in a close vote.
Catherine Palmer, head of fixed income strategy at BlackRock Australia, said that the challenge facing the central bank is continued inflationary pressures, coinciding with the beginning of a slowdown in economic growth momentum.
She added: “As the full impact of the interest rate increases approved this year on the economy continues to emerge, we expect the bank to keep interest rates at their current levels during the coming period, pending evaluation of the new economic data and the extent to which the impact of monetary policy has been transmitted to the economy, while retaining the option of tightening again if inflationary pressures do not decline.”
For his part, Stephen Smith, a partner at Deloitte Access Economics, said that the vote split of six votes to three reflects the budget difficulty facing monetary policy makers, at a time when families are reducing their spending and companies are facing weak demand.
He added, "The increase approved today enhances the risks of economic growth slowing at a pace exceeding expectations over the next year, at a time when inflation is still high."
In a separate update to its economic forecasts, the bank raised its inflation estimates significantly, expecting it to remain at high levels for a longer period, even assuming interest rates remain near their current levels for a year or more.
These forecasts indicate that the economy may enter into a prolonged period of weak growth and continued price pressures. Smith said that this scenario poses a challenge to families that have already begun reducing their spending, and to companies facing declining sales, adding that this may explain the division of board members over the decision to raise interest.
Fears of entrenched inflation
The Australian monetary authorities are concerned that the continued rise in oil prices will lead to the transfer of inflationary pressures to broader sectors of the economy, which may destabilize inflation expectations. Core inflation accelerated to its highest level in two years, recording 3.7 percent during the third quarter, after remaining for more than five years above the central bank’s target range, set between 2 and 3 percent.
The housing sector was most affected by the tightening of monetary policy, as the market is heading towards recording its largest decline in four decades. It is expected that this decline will lead to a reduction in household spending as a result of the decline in the value of their wealth, in addition to its repercussions extending to sectors related to real estate market activity, from real estate brokerage companies and property transfer offices to furniture moving companies.
The labor market also showed signs of slowing, with the unemployment rate rising to 4.7 percent, its highest level in five years. However, the Central Bank still believes that the labor market is experiencing some degree of tightness, and that it continues to be a source of inflationary pressures.
The Australian economy slowed under the weight of rising borrowing costs, but this slowdown was not enough to allay concerns about inflation, in light of the continued boom in investments in data centers, which boosts demand in an economy suffering from limited supply.
Copper prices fell on Tuesday, as the wave of risk aversion extended to industrial metals markets ahead of the US midterm elections, while the weakness of the yuan increased pressure on prices, as it made dollar-denominated goods more expensive for buyers in China, the largest consumer of the metal in the world.
The three-month standard copper price on the London Metal Exchange fell by 1.27 percent to $14,163.50 thousand per metric ton by 03:06 GMT. The most traded copper contract on the Shanghai Futures Exchange also fell by 0.18 percent to 108,380 thousand yuan ($16,302.65 thousand) per ton, according to Reuters.
Investors are closely awaiting the results of the US midterm elections, searching for indicators regarding the directions of fiscal policy and spending in the next stage, as well as the course of the conflict between the United States and Iran, which has cast a shadow on global growth prospects.
David Wilson, head of metals strategy at BNP Paribas, said: “Basic metals markets are witnessing a great deal of uncertainty ahead of the midterm elections, in light of the uncertainty surrounding the situation in the Middle East region.”
Opinion polls indicate that the Democrats are ahead to win the House of Representatives, while the competition for Senate seats is still so close that it is difficult to tip the balance in favor of either party.
The dollar rose 0.33 percent against the yuan, increasing pressure on copper by raising the cost of dollar-denominated purchases for Chinese buyers.
On the other hand, indicators of scarcity of material supplies in China limited the metal’s losses. Yangshan's copper premium, an indicator measuring demand for imported metal, remained near the $200 per ton level recorded on Monday, the highest in more than a decade, amid seasonal production cuts.
Wilson said: “We are seeing signs that Chinese smelters are starting to reduce production rates, but that is normal at this time of year.”
Stock exchange data showed that copper stocks in warehouses monitored by the Shanghai Futures Exchange reached 44,612 thousand tons, on Friday, a decrease of more than 75 percent compared to their levels six months ago.
On the London Metal Exchange, aluminum fell by 1.12 percent, zinc by 1.39 percent, lead by 1 percent, nickel by 0.71 percent, and tin by 3.14 percent.
As for the Shanghai Stock Exchange, aluminum fell by 0.4 percent, zinc by 0.29 percent, lead by 1.7 percent, and tin by 1.85 percent, while nickel rose by 0.63 percent.
The non-oil private sector in Kuwait continued its recovery path during October, with the growth in production and new orders accelerating to levels not recorded in months, coinciding with a record rise in purchasing activity and inventory of production supplies, according to purchasing managers’ index data issued by S&P Global.
The main index, seasonally adjusted, rose to 52.9 points in October, compared to 52.4 points in September, exceeding the neutral level of 50 points for the fourth month in a row. The reading indicates a strong monthly improvement in business conditions in the non-oil private sector.
The growth of new orders recorded its highest level in eight months, with the expansion continuing for the fourth month in a row, while export orders rose at a faster pace, as companies participating in the survey reported receiving new orders from customers in neighboring countries. Production growth also accelerated compared to September, continuing its upward trend since its return to growth in July.
The companies indicated that the improvement in demand and production was linked to several factors, including the launch of new products, the intensification of marketing activities, and the adoption of competitive prices.
In response to the increase in new orders, companies intensified their purchasing activity during October, and purchases of production inputs and inventory purchases recorded the highest growth rate since the start of data collection. Some survey participants reported that they took advantage of suppliers' offers to secure materials ahead of expected price increases in the coming months.
On the other hand, supply conditions improved, as suppliers’ delivery times recorded their shortest periods since the start of data monitoring, amid intensified competition between suppliers and improved availability of materials.
Staffing and costs
Regarding the labor market, employment growth remained limited, although its pace accelerated slightly compared to September, with the number of workers rising for the third month in a row. Some companies indicated that the lack of employees contributed to the accumulation of unfinished business, which rose for the fourth month in a row at a strong pace, approaching the record level recorded in February.
At the same time, inflationary pressures increased during October, as input costs rose at the fastest pace since February, driven by increases in the prices of a number of items, including advertising, machinery maintenance, spare parts and employees. Production prices also rose at a noticeable pace, although lower than the record level recorded in September 2021.
Despite escalating costs, companies' expectations for activity over the next 12 months improved for the fourth month in a row, reaching their highest levels since February. Companies attributed this optimism to the expected benefits of intensifying marketing activities and adopting competitive pricing policies, and the resulting increase in business.
Andrew Harker, director of economic studies at S&P Global Market Intelligence, said that the recovery in the non-oil private sector in Kuwait strengthened during October, with companies succeeding in obtaining new orders and increasing business volume. He added that companies responded to the increase in workloads by intensifying purchases and increasing inventory, noting that part of this expansion aims to avoid future increases in prices in light of the intensification of inflationary pressures.
Harker pointed out that recruitment remained one of the areas that recorded modest growth, as companies linked delays in project completion to a shortage in employee numbers, but he pointed out that the workforce increased for the third month in a row, with companies following a slow and steady approach to recruitment.
