Australia’s central bank has raised its cash-rate target to 4.85 per cent after a divided vote, taking it to its highest level since 2008. Six members of the Reserve Bank of Australia’s monetary policy board backed the quarter-point increase on 3 November, while three wanted to leave the target unchanged at 4.60 per cent.
The increase was the fifth of 2026. The target began the year at 3.60 per cent and had risen to 4.60 per cent by the end of September. The new target took effect on 4 November, in line with the bank’s practice of implementing a change the day after a decision.
What the change means
The cash rate is the interest rate on unsecured overnight loans between banks. It is a benchmark for other rates across Australia’s economy, rather than the rate charged directly on every mortgage or paid on every savings account.
A lender that passes on the increase can raise costs for borrowers with variable-rate loans. Savers may receive more interest if their provider raises deposit rates. Neither outcome is automatic: financial institutions set their own rates, and the size and timing of changes can differ.
Higher borrowing costs generally make spending and investment less attractive, helping to reduce pressure on prices over time. The process is not immediate. Households and businesses take time to adjust, and the size and timing of the overall effect are uncertain.
Inflation and the economic outlook
The board said inflation remained elevated across a broad range of goods and services. It had revised its inflation outlook materially higher and judged that pressures on the economy’s capacity were a little greater than previously estimated. Members in the majority considered further tightening necessary to support a return to the inflation target.
Higher fuel and other commodity prices associated with the Middle East conflict form part of that outlook. Governor Michele Bullock said the bank could not control global oil prices directly, but monetary policy could help limit the indirect effects as higher fuel costs work their way into other prices.
The bank is also concerned that a prolonged period of high inflation could affect expectations. If businesses expect costs to keep rising, they may be more inclined to raise the prices they charge. The board said there was an increasing risk that higher inflation expectations could become embedded.
In its central forecast, the bank expects annual headline inflation to peak at 4.5 per cent in the December 2026 quarter. It expects inflation to reach the top of its 2–3 per cent target range in late 2027, about three quarters later than previously forecast, and the midpoint around the middle of 2028.
Those figures are projections, not guaranteed outcomes. The forecasts were finalised on 28 October and use a cash-rate path based on financial-market pricing at the time. That assumption is an input to the forecast, not a promise by the board to make a particular series of rate changes.
The outlook also points to a weaker labour market. The bank now forecasts unemployment at 5.1 per cent in the December quarter of 2028, compared with 4.8 per cent in its August projections. It still expects the number of people in employment to grow, even as the unemployment rate rises.
Why the board was divided
Bullock said the members who favoured holding the rate placed greater weight on the risks of weakening activity. In her account, they pointed to the response in housing, rising unemployment and the absence of signs that wage growth was accelerating. After four earlier increases this year, they wanted more time to assess incoming data.
The majority placed more weight on the risk that inflation would stay too high. The bank said the economy was slowing and housing prices had fallen significantly, but that price pressures remained broad. It expects output growth to slow further over the coming year.
The board’s September statement had explicitly referred to increasing the cash rate further if needed; that wording did not appear in the November statement. Bullock cautioned against treating its removal as a signal of a fixed future path. She said the next move was not known and that the board would watch the data closely.
The next scheduled board meeting is on 7 and 8 December, with its decision due on the second day. The bank says future decisions will be guided by incoming information and its assessment of the outlook and risks, rather than by an automatic response to this vote.
