RBA hikes rates to 4.85% as oil shock delays price relief

More than 3.3 million Australian households with home loans will see their monthly interest costs rise this month. The Reserve Bank of Australia (RBA) increased the official cash rate by 0.25 percentage points to 4.85 percent, marking its fifth adjustment in 2026. For a standard $700,000 mortgage, this change adds $107 to the monthly interest payment, according to data from Canstar. Cumulatively, the five increases this year have raised monthly repayments by $532 for the average borrower.

The decision places the cash rate at its highest level since 2008. The move was driven by a spike in annual inflation to 4.3 percent in September, a figure that exceeded the bank's internal forecasts. The RBA cited a global oil shock resulting from the ongoing conflict in the Middle East as a primary factor in the worsening price outlook. Six members of the monetary policy board voted for the increase, while three dissented in favor of holding rates steady.

The bank’s latest Statement on Monetary Policy projects that inflation will continue to rise through the end of 2026. The RBA expects prices to fall below the 3 percent threshold by the end of 2027, returning to the target range of 2 to 3 percent. This timeline represents a delay of roughly nine months compared to previous estimates. Although oil prices are forecast to decline over the next 18 months, the bank anticipates they will remain elevated, limiting immediate relief for consumers and businesses.

Economic growth is expected to lag behind the economy's potential in the coming years. The RBA forecasts a growth rate of 1.6 percent for 2026 and 1.3 percent for 2027, both below the estimated potential of around 2 percent. This projection is stronger than recent estimates from other bank analysts but still indicates a period of weak expansion through 2028. Unemployment is projected to climb from 4.7 percent to approximately 4.9 percent by the end of 2027 before exceeding 5 percent in 2028.

The bank attributed weaker public demand in the first half of 2026 to the expiration of cost-of-living measures and slower spending in defense, disability services, and aged care. This finding contrasts with political debates suggesting federal spending is the primary driver of inflation. The RBA also noted that the global artificial intelligence boom is adding to capacity pressures in Australia. Consequently, the bank nearly tripled its forecast for business investment growth this year to 12 percent.

The RBA stated that while inflation risks are tilted toward higher outcomes, it did not explicitly signal further rate increases in the immediate term. The board indicated it is prepared to assess the impact of the tightening measures already implemented this year. The bank's economists found no evidence pointing to a recession in the next two years, despite risks associated with a steep housing downturn.