The Reserve Bank of Australia (RBA) has raised its official cash rate from 4.6% to 4.85%, representing the fifth interest rate increase of 2026. This decision brings the cash rate to its highest level since 2008 as the central bank seeks to regain control over inflation, which jumped to 4.3% in the year leading up to September. The move comes amid an ongoing global oil shock triggered by conflict in the Middle East and follows recent warnings from senior central bank officials.
The monetary policy board was divided on the decision, with six members voting for the hike while three favored holding the rate steady. In its post-meeting statement, the board reiterated its commitment to doing what is necessary to bring inflation sustainably back to target. However, the statement did not explicitly reference the need for further immediate hikes, signaling that the RBA may now pause to observe the effects of this year's five consecutive rate rises.
The latest increase places additional financial pressure on more than 3.3 million Australian households with home loans. According to Canstar, the hike will raise monthly interest payments on a $700,000 mortgage by $107, bringing the total increase in repayments across this year's five hikes to $532. This development intensifies scrutiny on the federal government regarding its economic management as back-to-back hikes exacerbate the cost of living crisis.
The RBA's latest Statement on Monetary Policy (SOMP) forecasts a difficult period ahead, predicting that the cost of living crisis will extend for another year despite below-trend economic growth and rising unemployment. Inflation is expected to push higher through the final months of 2026, only returning below the 3% threshold within the bank's target range by the end of next year, approximately nine months later than previously hoped.
While global oil prices are forecast to ease over the coming 18 months, they are expected to remain relatively elevated, offering limited relief for motorists and businesses. The RBA noted that public demand was weaker than anticipated in the first half of 2026 due to cost-of-living measures rolling off and moderating spending in sectors such as defense, disability, and aged care services. Despite these challenges, the central bank's economists see no evidence that Australia is heading toward a recession over the next two years.
Economic growth is projected at 1.6% for this year and 1.3% in 2027, figures that remain below the estimated potential growth rate of about 2%. Unemployment, currently at 4.7%, is expected to reach approximately 4.9% by the end of next year before creeping above 5% in 2028, though employment levels are forecast to remain positive. Additionally, the global artificial intelligence boom is expected to continue adding to capacity issues in Australia, with the RBA nearly tripling its forecast for business investment growth in 2026 to 12%.
Sources: The Guardian World.