The Reserve Bank of Australia has raised the official cash rate to 4.85 per cent, marking the fifth interest rate increase this year. This decision takes borrowing costs to their highest level since 2008 and intensifies pressure on Australian households and businesses.
The increase follows inflation data showing consumer prices rose by more than 4 per cent over the year to September, moving further away from the RBA’s target range of 2–3 per cent.
Monetary Policy Tightening
RBA Governor Michele Bullock acknowledged the hardship the decision would impose on households but argued that further monetary tightening was necessary to prevent inflation from becoming more difficult to control. “This is not the news that many Australians want to hear, but it is what’s needed to get inflation down,” Bullock said.
She added that “some pain now will prevent even worse pain down the track,” defending the bank’s decision despite mounting pressure on household budgets. Bullock said mortgage holders were not the only Australians suffering from higher living costs, pointing to increases in groceries, electricity, insurance, and other essential expenses.
Economic Growth and Employment
The decision was not unanimous, with six of the nine board members voting for the increase and three preferring to leave rates unchanged. Those opposing an immediate increase were concerned about the potential consequences for employment and the housing market, particularly after four previous rate increases this year.
Bullock said the board’s central forecasts did not anticipate a recession, although economic growth was expected to slow considerably. “Our central forecasts do not see us going into recession, but it does see growth slowing quite markedly,” she said.
Government Response
Treasurer Jim Chalmers said the increase would create additional difficulties for Australians already struggling with the cost of living. “Today’s decision was widely expected, but that doesn’t make it any easier for Australian families and businesses to absorb,” Chalmers said.
The treasurer pointed to the continuing conflict in the Middle East as a significant contributor to inflationary pressures, particularly through higher energy costs. “The war’s in its ninth month and its re-escalation is putting sustained upward pressure on inflation,” he said, adding that the conflict was also weighing on economic growth.
Outlook and Projections
The latest increase will add to the financial burden facing Australians with variable-rate mortgages, while also increasing borrowing costs for businesses reliant on credit. For households, higher repayments are likely to further constrain discretionary spending, potentially affecting retailers, hospitality operators, and other consumer-facing businesses.
With interest rates now at an 18-year high, the immediate priority for the RBA remains restoring inflation to its target range. Whether further increases will be required depends on incoming economic data and evidence that price pressures are finally easing.
The head of Australian economics for the Commonwealth Bank, Belinda Allen, told Nine Newspapers she expects the RBA to start cutting rates from the second half of next year, however, warned the central bank will maintain a cautious outlook. “Overall though we think the RBA will remain on edge as we enter 2027 but keep rates on hold,” she said. NAB chief economist Sally Auld told the same masthead, “With policy restrictive, we forecast the RBA on hold. However, the RBA will remain very sensitive to any upside surprise in inflation in coming months.”
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