RBA raises cash rate to 4.85% as inflation outlook worsens

The Reserve Bank of Australia has lifted its cash rate from 4.6% to 4.85%, delivering its fifth increase of 2026 as it seeks to contain inflation intensified by the global oil shock stemming from war in the Middle East. The decision takes the rate to its highest point since 2008 and adds financial pressure on households with mortgages.

Six monetary policy board members supported the increase, while three preferred to leave rates unchanged. The move followed firm signals from senior bank officials and a rise in annual inflation to 4.3% in September. The board reaffirmed its commitment to returning inflation sustainably to its target, but omitted an explicit reference to possible further increases, suggesting it is prepared to assess the effects of the tightening already undertaken this year.

More than 3.3 million households with home loans face additional pressure from consecutive rate rises. According to Canstar, the latest increase will add $107 to the monthly interest payment on a $700,000 mortgage. Across all five increases this year, the rise in monthly repayments totals $532. The decision also adds to pressure on the federal government over its handling of the economy.

The bank’s latest Statement on Monetary Policy points to another year of cost of living difficulties alongside growth below the economy’s potential and increasing unemployment. September’s inflation reading was considerably higher than the RBA had expected, with the worsening Middle East conflict undermining hopes that the disruption to global oil supplies would be resolved quickly.

Inflation is forecast to accelerate over the remaining months of 2026 before falling below 3% by the end of 2027, returning to the bank’s target range of 2% to 3%. That would be roughly nine months later than previously hoped. Although oil prices are expected to decline over the next 18 months, the bank anticipates they will remain relatively high, limiting relief for motorists and businesses. It also sees inflation risks as tilted towards higher outcomes.

As political arguments continue over whether federal spending is driving inflation, the RBA reported that public demand had been weaker than expected in the first half of 2026. It attributed that outcome to the expiry of cost of living measures and slower spending in areas including defence, disability services and aged care.

The bank forecasts economic growth of 1.6% in 2026 and 1.3% in 2027, both below estimated potential growth of around 2%, although stronger than recent predictions from bank analysts. Weak growth is expected to persist through the end of 2028. Despite risks from a housing downturn ranked among the steepest of the past 50 years, the bank’s economists found no evidence pointing to recession over the next two years.

Unemployment is projected to rise from 4.7% to about 4.9% by the end of 2027, then exceed 5% in 2028, while employment growth remains positive. The global artificial intelligence boom is also expected to continue, adding to capacity pressures in Australia. The RBA nearly tripled its forecast for business investment growth this year to 12%.