Australia’s Central Bank Raises Interest Rates to 4.85%

The Reserve Bank of Australia raised its cash rate target by a quarter of a percentage point to 4.85% on Tuesday, November 3, taking the benchmark to its highest level since 2008. The increase from 4.60% was the central bank’s fifth rate rise this year, adding to pressure on mortgage borrowers as inflation remains well above its target range.

The decision was not unanimous. Six members of the Monetary Policy Board voted to increase the rate, while three preferred to hold it at 4.60%. The split highlights the difficult choice facing policymakers: restraining persistent price pressures without causing a sharper slowdown in spending, housing activity and employment.

The RBA’s November 3 decision said higher energy costs were increasingly feeding into prices elsewhere in the economy. Officials also cited a broader rise in business costs and signs that demand was putting more pressure on available capacity than previously estimated. The new cash rate target takes effect on November 4.

Inflation has become a broader problem than fuel prices

The latest Australian Bureau of Statistics inflation report put consumer prices 4.3% higher in September than a year earlier, up from 4.0% in August. Trimmed mean inflation, a measure that reduces the effect of the largest price changes, increased to 3.6% from a revised 3.5%. Both readings were above the RBA’s 2% to 3% inflation target.

Higher global oil prices have been an important part of the increase, but the latest data suggest the problem is not confined to petrol. Housing costs were 5.2% higher than a year earlier in September, according to the ABS. Transport prices rose 8.7%, and automotive fuel prices increased 9.4% over the month alone. The underlying inflation measure remained elevated even after the most extreme price movements were reduced in the calculation.

That distinction matters for interest-rate policy. A central bank cannot directly reverse a disruption to global oil supplies, but it can try to prevent higher fuel and freight costs from becoming a lasting source of price increases across the economy. The RBA is concerned that businesses and households may begin expecting inflation to remain high, making it harder to bring price growth back to target.

The revised forecasts show how much the outlook has changed. The RBA now expects headline consumer inflation to reach 4.5% in the December 2026 quarter, compared with a forecast of 3.6% made in August. It expects both headline and underlying inflation to stay above 3% until late 2027, with a return to around 2.5%, the middle of its target range, not expected until mid-2028.

The rise in oil and other commodity prices linked to the conflict in the Middle East is one reason for the revisions. Domestic conditions are another. In its November monetary policy assessment, the central bank said cost pressures had persisted even as the economy slowed, suggesting that the available supply of workers and productive capacity might be more constrained than it previously thought.

A split board confronts slowing growth and weaker housing

November’s increase brings the total tightening in 2026 to 1.25 percentage points. The cash rate was 3.60% at the end of 2025 and has since risen in five quarter-point steps. That is a considerable change for borrowers whose repayments are linked to variable interest rates, even before allowing for differences in how individual lenders price their loans.

The three votes to keep rates unchanged show that the case for further tightening was not uncontested. Australia’s housing market has weakened, and employment conditions have softened. The RBA estimated that housing prices in September were almost 5% below their March peak, while the unemployment rate averaged 4.6% in the September quarter, higher than policymakers had expected in their earlier outlook.

The central bank nevertheless judged that inflation risks required more restraint now. It cited evidence that higher fuel prices were being passed into the cost of other goods and services, along with the danger that inflation expectations could become embedded. The decision therefore reflects a judgment about risks rather than any claim that the economy is still growing strongly.

Its updated projections make that trade-off clear. Annual GDP growth is forecast to slow to 1.3% by the end of 2027, and unemployment is projected to reach 5.1% by late 2028. Those are forecasts rather than outcomes, and they assume interest rates follow a path informed by financial market pricing, not a set of future increases promised by the Board.

Investment in data centres is one source of support for activity and has led the RBA to upgrade some near-term growth expectations. Even so, policymakers expect weaker housing conditions and higher borrowing costs to weigh on consumption and construction over time. They also acknowledge the risk that the economy could slow more than anticipated if households react more sharply to declining housing wealth and higher living costs.

What the higher cash rate means for households and the next decision

The cash rate is the benchmark for overnight lending between banks, not the interest rate charged on every mortgage or savings account. Retail lenders decide how much of a central bank increase to pass on. Variable-rate mortgage customers could face higher repayments if their lender raises rates, while the effect on fixed-rate borrowers depends on when their current loan period ends.

Savers may benefit if banks increase deposit rates, although those changes are not automatic or necessarily equal to the cash rate move. For businesses, higher funding costs can make borrowing and investment less attractive. The RBA’s intended effect is to cool demand sufficiently for inflation to ease, but its policy works with a delay and cannot eliminate supply-driven price shocks.

There is also no predetermined next move. The six-to-three vote shows that some Board members already saw a case for waiting to assess the effect of earlier increases. The central bank said it would respond to incoming economic data and the changing balance of risks rather than commit to a further rise or an immediate pause.

The next major inflation reading is the ABS report for October, scheduled for November 25. Minutes of the November policy meeting are due November 17, which could provide more detail on the disagreement among Board members. The RBA is scheduled to make its next cash rate decision on December 8.