RBA raises cash rate to 4.85%, an 18-year high

The RBA Monetary Policy Board voted 6–3 to raise the official cash rate by 25 basis points to 4.85%. That is the highest cash rate in 18 years. The last time it was this high was briefly during the GFC, when Governor Stevens cut interest rates sharply in late 2008.

The increase was widely expected. In recent weeks, senior RBA staff had repeatedly warned that inflation remained too high and that businesses were starting to doubt the RBA would bring it back to target, and the Q3 trimmed mean CPI printed at 1% q/q. That very high result has pushed back the return of inflation to target by a further six months. Without today's tightening, the delay would have been even longer, and inflation would not have dipped into the top of the band late next year. The delay suggests the RBA may have more work to do, although I don't expect it to act again quickly.

The RBA's updated forecasts point to an even slower period of growth over the next two years, which the Bank believes is needed to bring inflation back to target. Growth for 2027 has been revised down from 1.6% to 1.3%. The forecasts also show unemployment continuing to rise slowly. The media is likely to seize on the 5% and 5.1% unemployment forecasts for 2028. What matters is whether that rise comes from more people joining the labour force, as has been the recent trend, or from more people losing their jobs. I remain sceptical of the ABS's latest unemployment estimates, which the RBA has had to use as the starting point for these forecasts, and I expect some retracement (decline) in coming months. As in previous forecasts, the projected increase in unemployment is very gradual.

The important core rate of inflation is now forecast to return to target in the first half of 2028, six months later than previously expected. With core inflation at 2.9% or above throughout 2027, this might suggest the RBA has some more work to do. The Decision itself warns of upside risks to inflation expectations as a result.

More broadly, I remain very sceptical of the RBA's forecasts. Their models cannot possibly capture the very large forces hitting the economy at the same time. These include the AI spending boom, geopolitics and the Middle East conflict, this year's excessive, non-market-based Fair Work Commission wage increase, slowing migration, the ageing population, climate change and El Niño.

The RBA has now raised rates back-to-back and five times in total over 2026. I expect it to keep the cash rate unchanged for some months, at least until February and probably longer, while it assesses the impact of this considerable tightening on the economy. The 6–3 split might seem to make a pause more likely. However, there is probably still a core group of Board members who mostly follow the RBA's recommendation. It's worth remembering that the RBA always sounds hawkish when it tightens and dovish when it eases.