Australia's RBA raises interest rates to 4.85% to combat inflation

The Reserve Bank of Australia (RBA) raised its benchmark cash rate by 25 basis points to 4.85% on Tuesday, the highest level since November 2008. The decision was a split vote, with six members voting for the increase and three opting to hold the rate at 4.60%.

Inflation Forecasts and Drivers

The RBA has significantly revised its inflation projections. The central bank stated that inflation is now expected to "remain elevated through much of 2027," and is not expected to return to its 2%-3% target range until late 2027. This is a delay of approximately six to nine months compared to previous forecasts.

According to the RBA, several factors are contributing to these persistent price pressures:

• Higher fuel and other commodity prices, partly driven by the conflict in the Middle East.
• Rapid growth in prices for technology-related goods due to AI-related investment.
• Strong domestic spending and capacity pressures.

Annual headline inflation rose to 4.3% in September, up from 4% in August. The RBA's preferred measure of underlying inflation, known as the trimmed mean CPI, increased to 3.6% in September.

Economic Outlook and Employment

While the RBA is attempting to curb inflation, the tightening of monetary policy is impacting economic growth and employment. Australia's GDP rose 2.1% in the June quarter, a decrease from 2.5% in the March quarter. The RBA's updated forecasts suggest economic growth could slow to 1.6% by the end of 2026.

Regarding the labor market, the RBA has raised its unemployment forecast. The rate currently stands at a five-year high of 4.7%, and the central bank now expects it to reach 5.1% by the end of 2028.

Impact on Households

The interest rate hike is expected to increase costs for borrowers. For an average new owner-occupier home loan of $731,000, monthly repayments are expected to increase by approximately A$120 to A$122. Total increases from the five rate hikes implemented since February 2026 are estimated to add roughly $600 per month to average repayments.

Governor Michele Bullock addressed the decision during a news conference, stating, "Raising interest rates today is necessary to slow the economy and return inflation to target." She added, "Some pain now will prevent even worse pain down the track."

---

Sources

• cnbc.com: Australia hikes rates to 18-year high to fight inflation
• finance.yahoo.com: RBA hikes interest rates to 2008 levels, sharply raises inflation forecasts
• theconversation.com: RBA hikes interest rates to an 18-year high, warning inflation will hurt for another year
• news.az: Australia raises key interest rate to 18-year high | News.az
• thenightly.com.au: RBA interest rates: Monetary board hikes to 18-year high of 4.85 per cent to combat rising inflation | The Nightly
• thestar.com.my: Australia's central bank hikes rates to 18-year high in a split vote | The Star

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.