The Reserve Bank of Australia (RBA) has raised its official cash rate to 4.85%, marking the fifth increase this year and the highest level since 2008. This decision aims to curb rising inflation, which hit 4.3% in the year leading up to September, amid a global oil shock exacerbated by the ongoing conflict in the Middle East.
The RBA's monetary policy board was divided on the decision, with six members supporting the rate hike while three preferred to maintain the current rate. The board's post-meeting statement emphasized its commitment to bringing inflation back to target levels, though it stopped short of indicating further rate hikes, suggesting a wait-and-see approach following this year's series of increases.
The impact of these rate hikes will be felt by over 3.3 million households with home loans, as the latest increase will add $107 to the monthly payment on a $700,000 mortgage. This brings the total increase in repayments to $532 over the course of the year, intensifying pressure on the federal government regarding its economic management.
In its latest Statement on Monetary Policy (SOMP), the RBA outlined a challenging economic outlook, with the cost of living crisis expected to persist for another year. The forecasts predict that inflation will remain above the bank's 2-3% target range until the end of next year, driven by external factors such as the Middle East conflict and its impact on global oil prices.
The RBA's report also noted that public demand was weaker than anticipated in the first half of 2026, due to the phasing out of cost of living measures and reduced spending in areas like defense and aged care services. While global oil prices are expected to ease over the next 18 months, they will likely remain high, offering limited relief for consumers and businesses facing elevated fuel costs.
Despite the economic challenges, the RBA does not foresee a recession in the near future. The economy is projected to grow by 1.6% this year and 1.3% in 2027, which, although below the estimated potential growth rate of around 2%, is more optimistic than recent forecasts by bank analysts. Unemployment, currently at 4.7%, is expected to rise to 4.9% by the end of next year and exceed 5% by 2028, though employment levels are anticipated to stay positive.
The RBA also highlighted the ongoing global artificial intelligence boom, which continues to contribute to capacity issues in Australia. The bank has significantly increased its forecast for business investment growth in 2026 to 12%, reflecting the influence of AI advancements on the economy.
