ASX 200 Rises 0.3% as RBA Hikes Rates to 18-Year High in Split Vote, With Dovish Signals Lifting Shares Late

SYDNEY — Australian shares closed higher on Tuesday after the Reserve Bank of Australia raised interest rates to their highest level in 18 years, as investors focused on signs the central bank may be nearing the end of its tightening campaign.

The S&P/ASX 200 index rose 30.3 points, or 0.34%, to close at 8,886.8 on Melbourne Cup day, recovering part of Monday's 0.6% decline.

A volatile session

The market opened strongly, with the benchmark up 0.43% to 8,894 in the first half hour of trading as gains in mining and industrial stocks lifted the index.

Gains faded around midday, and the index slipped into slightly negative territory, trading at 8,855 at 1:30 p.m. local time amid reports of fresh U.S. strikes on Iran, according to Capital Brief.

The index dipped again briefly when the RBA announced its decision at 2:30 p.m., falling about 0.15% at its session low, before rebounding sharply into the close.

Fifth hike this year

The RBA raised its cash rate target by 25 basis points to 4.85%, its fifth increase in 2026 and the highest level since late 2008. The central bank also raised rates in February, March, May and September.

The decision was widely expected. Money markets had priced in about an 80% chance of a hike.

But the vote was split. Six members of the nine-member Monetary Policy Board voted for the increase, while three voted to leave the rate unchanged at 4.60%.

In its statement, the board said it "is conscious of the period in which inflation has been too high."

The RBA said it now expects inflation to remain above its 2% to 3% target band for longer, not reaching the top of the range until late 2027.

Dovish undertones

Despite the rate hike, investors focused on the central bank's acknowledgment that its tightening is already slowing the economy.

The RBA said the economy is slowing, housing prices have fallen significantly this year and unemployment has risen.

UBS chief economist George Tharenou described the RBA's statement as "clearly dovish," according to ABC News.

The policy-sensitive three-year government bond yield fell about 8 basis points after the decision, a sign that markets expect fewer hikes ahead.

At a press conference after the decision, Governor Michele Bullock signaled a wait-and-see approach to further tightening, highlighting that the impact of this year's rate increases has yet to fully feed through to the economy, according to Bloomberg.

The RBA's aggressive tightening has made it an outlier among major central banks. The U.S. Federal Reserve, the European Central Bank and others have held rates steady in recent weeks.

Australian dollar falls

The Australian dollar dropped after the decision, falling about 0.3% to 69.76 U.S. cents, as traders bet the hike could be the last for some time.

Energy stocks slide

Energy shares were the weakest performers on Tuesday, tracking a sharp drop in oil prices on Monday amid hopes for U.S.-Iran talks. The energy sector fell as much as 3.8% early in the session.

Woodside Energy fell 3.5%, Santos lost 3.7%, Ampol dropped 2.5% and Karoon Energy slid 4.6%, according to Capital Brief.

Financial services company AMP fell 5.3%, and mortgage insurer Helia Group lost 3.6%.

Among the early gainers, Sunrise Energy rose 5.1%, defense technology company Electro Optic Systems gained 4.6%, and mining services company Imdex climbed 3.9%.

Pain for borrowers

The rate hike adds to the burden on Australian homeowners. For the average borrower with a 600,000 Australian dollar mortgage, the five increases this year mean monthly repayments are more than A$450 higher than in February, according to comparison site Canstar.

Treasurer Jim Chalmers said Australians are paying a hefty price for the prolonged conflict in the Middle East, which has pushed up energy prices and inflation.

Higher rates, however, benefit savers, as returns on deposits and term accounts rise.

Monday's decline

Tuesday's gain followed a weak start to the week. On Monday, the ASX 200 fell 51.6 points, or 0.6%, to 8,856.5 as investors reduced exposure to miners, banks and consumer staples ahead of the RBA meeting.

The market had posted its best week since August last week, rising about 1.3%.

Outlook

Economists are divided on what comes next. Commonwealth Bank expects the RBA to hold rates steady before cutting in August and November 2027.

Others see risks of further increases if inflation proves stubborn, with some economists warning the cash rate could reach 5.1% in December or February.

Investors will watch upcoming inflation and employment data, as well as developments in the Middle East and oil prices, for clues on the RBA's next move.

Global events this week, including the U.S. midterm elections and Friday's U.S. jobs report, are also expected to influence market sentiment.