RBA Hikes Rates to 4.85% as Inflation Defies Forecasts

The Reserve Bank of Australia raised the cash rate from 4.6% to 4.85% on Tuesday, marking the fifth increase in 2026. The move places the benchmark interest rate at its highest point since 2008. The central bank acted to counter surging inflation driven by a global oil shock from the Middle East war.

The decision split the monetary policy board. Six members voted for the hike, while three members favored holding the rate steady. The board stated it will continue to do what it considers necessary to bring inflation sustainably back to target. The post-meeting statement did not explicitly promise further hikes, suggesting the bank will now assess the impact of the current increases.

Inflation reached 4.3% in the year to September. This figure was substantially higher than the bank had anticipated. The worsening conflict in the Middle East squashed hopes for a quick resolution to the global oil shock. The RBA's latest forecasts indicate that inflation will remain above the 2% to 3% target range until the end of next year. This timeline is approximately nine months later than previously hoped.

The rate hike will increase the monthly interest payment on a $700,000 home loan by $107, according to Canstar. This brings the total rise in repayments over this year's five hikes to $532. Over 3.3 million households with home loans will face higher costs. The increased burden adds pressure on a federal government already facing criticism for its economic management.

The Statement on Monetary Policy outlines a challenging economic outlook. The cost of living crisis is expected to extend for another year. Economic growth remains below trend, and unemployment is climbing. The RBA noted that public demand was weaker than expected in the first half of 2026. This slowdown resulted from cost of living measures rolling off and moderating spending in defense, disability, and aged care services.

Global oil prices are forecast to ease over the next 18 months but will remain relatively elevated. This suggests limited relief for motorists and ongoing high costs for businesses. The report stated that risks to the inflation outlook are still skewed to the upside. The bank also predicted weak economic growth through to the end of 2028.

Economic growth is projected at 1.6% for 2026 and 1.3% for 2027. These figures are well below the estimated potential growth rate of about 2%. However, they are better than recent forecasts from bank analysts. Unemployment, currently at 4.7%, is expected to reach approximately 4.9% by the end of next year. It will creep over 5% in 2028, though employment is expected to remain positive.

The RBA identified a housing downturn as one of the steepest over the past 50 years. Despite this risk, the central bank's economists see no evidence that Australia is headed toward recession in the coming two years. The bank nearly tripled its forecast for business investment growth in 2026 to 12%. This surge is attributed to the ongoing global artificial intelligence boom, which continues to add to capacity issues in Australia.