Reserve Bank of Australia raises cash rate to 4.85%

Statement on Monetary Policy forecasts inflation below 3% only by end of 2027

The Reserve Bank of Australia raised its official cash rate from 4.6% to 4.85% on Tuesday, the fifth increase this year. The rate reached its highest level since 2008, and the monetary policy board split the decision 6-3, with six members voting for a hike and three favoring a hold.

The post-meeting statement said the board “will continue to do what it considers necessary to bring inflation sustainably back to target”. The statement did not explicitly refer to the potential need for further hikes, signaling that the RBA was prepared to wait and see the effects of this year’s five increases.

This year’s five rate increases were back-to-back, and the latest increase will raise repayments on more than 3.3 million Australian households with home loans while adding to the pressure on the federal Labor government over its economic management. Canstar estimated the latest rise would add $107 to the monthly payment on a $700,000 home loan and bring the total increase in repayments across this year’s five hikes to $532.

The decision was not surprising after inflation jumped to 4.3% in the year to September and followed recent comments by senior central bank officials over recent days and weeks, The Guardian reported. The 4.3% rate was substantially stronger than the RBA had anticipated, as a worsening Middle East conflict undermined hopes of a quick resolution to the global oil shock triggered by the war in the Middle East. The RBA raised rates in an attempt to regain control of surging inflation amid that ongoing global oil shock.

The RBA’s latest set of forecasts, published in its Statement on Monetary Policy (SOMP), pointed to a difficult period ahead for the economy. The bank said inflation would rise through the final months of 2026 and fall below 3% only by the end of 2027, putting it within the bank’s 2-3% target range about nine months later than hoped. The central bank also projected that the country’s cost-of-living pressures would extend for another year, even as growth remained below trend and unemployment increased.

Public demand was weaker than expected through the first six months of 2026, the RBA said in its Statement on Monetary Policy, as cost-of-living measures rolled off and spending in areas including defense, disability and aged-care services moderated. The finding came amid a heated political dispute over whether the federal government’s spending was responsible for high and rising inflation.

Global oil prices were expected to ease over the coming 18 months but remain relatively elevated, limiting relief for motorists and leaving businesses with high costs. “We view the risks to the inflation outlook as still skewed to the upside,” the report said.

Growth forecasts remained weak. The RBA expected the economy to grow 1.6% this year and 1.3% in 2027, below an estimated potential growth rate of around 2% but better than recent forecasts by bank analysts. It also forecast weak economic growth through the end of 2028.

The RBA said the global artificial intelligence boom had no end in sight and would continue to add to capacity issues in Australia. It nearly tripled its forecast for business investment growth in 2026 to 12%.

The RBA identified the risk of a housing downturn that “is one of the steepest over the past 50 years”. Its economists nevertheless saw no evidence that Australia was headed toward a recession over the coming two years. Unemployment, currently 4.7%, was expected to end next year at around 4.9% before rising above 5% in 2028, with employment remaining positive.