Dearer energy, sticky prices: why the RBA kept tightening and what it means for the region

Australia lifted its cash rate to 4.85 per cent as the IMF warned that energy importers face the hardest road. Sri Lanka shows how the same shock lands on a smaller economy.

Nearly two weeks after the Reserve Bank of Australia (RBA) raised interest rates for the fifth time this year, the picture it painted is a hard one. Prices are rising too fast, growth is cooling, and the usual cure, higher rates, works slowly. The IMF's latest global outlook says the same shock is spreading well beyond Australia.

What the RBA did

On 3 November the RBA's Monetary Policy Board lifted the cash rate target by 25 basis points to 4.85 per cent, from 4.60 per cent. It is the highest level since late 2008. The vote was split: six members backed the rise and three wanted to hold.

The Board said inflation is "broadly based". Headline inflation was 3.9 per cent over the year to the September quarter and trimmed mean inflation was 3.7 per cent, according to the RBA's November Statement on Monetary Policy. Higher fuel prices linked to the Middle East conflict are part of the story. The RBA also judged that domestic capacity pressures are tighter than it thought in August, and that firms are passing on costs.

The forecasts, and how to read them

The RBA now expects inflation to stay above 3 per cent until the end of 2027 and to reach the middle of its 2-3 per cent target range in mid-2028. These are forecasts, not outcomes. They depend on energy prices and on how households and businesses behave.

The RBA's forecast table puts unemployment at an average 5.1 per cent in the December quarter of 2028, compared with its August projection of 4.8 per cent. This is a quarterly average forecast, not an unemployment rate already recorded. The adjustment is part of the bank's assessment of the slower growth needed to bring inflation back to target.

The latest published monthly unemployment rate is 4.7 per cent for September, from the Australian Bureau of Statistics (ABS). Employment fell by about 39,000, participation slipped to 66.8 per cent and trend unemployment remained 4.6 per cent. The ABS cautions that changes to supplementary-survey collection may have left residual seasonal effects in September's adjusted figures, and recommends trend data for reading the underlying labour market. A single monthly fall should not carry the whole argument.

A slowing economy, but not a recession call

The RBA says housing prices in September were almost 5 per cent below their March peak, and that higher rates and tax changes announced in the federal budget are weighing on household spending and home building. Business investment, including spending on data centres, is helping to offset that.

Governor Michele Bullock was direct about the trade-off. "We are not looking to tip the economy into recession if we can avoid it," she said. "But we do need to get inflation down." The RBA's central forecast does not include a recession, but it does see growth slowing "markedly", she said.

One worry is behind the decision. Deputy Governor Andrew Hauser said last month that a growing share of businesses think 3 to 3.5 per cent inflation may be the new normal. The RBA wants to stop that belief from setting in.

The global backdrop

The IMF's October World Economic Outlook expects global growth of 3.1 per cent in 2026, and 3.4 per cent in 2027. It expects global headline inflation to rise to 4.7 per cent in 2026 and ease to 4.1 per cent in 2027. It says economies outside the technology supply chain that import energy face the toughest outlook.

The Fund lists four main risks: escalation of conflicts, a reassessment of expectations for artificial intelligence (AI), renewed trade tension and fiscal weakness. The RBA's own review notes that AI investment overseas has so far offset the damage from the Middle East conflict in Australia's trading partners, but it expects that boost to fade.

The Sri Lanka angle

Sri Lanka is an energy importer, and the numbers show the strain. In its 2027 Budget speech on 12 November, President Anura Kumara Dissanayake said Sri Lanka spent US$4.4 billion on fuel in the first nine months of this year, as much as in all of 2025. Inflation rose to 8.3 per cent in October from 2.2 per cent in March.

There is good news too. Reserves have been rebuilt to US$6.9 billion, the World Bank forecasts growth of 4.4 per cent this year, and Fitch upgraded Sri Lanka to B-minus in September. The government says it expects to complete the IMF programme in March 2027 and projects debt at 92.9 per cent of GDP in 2026, down from 114.2 per cent in 2022. Those debt projections are the government's own.

What to watch this week

RBA minutes of the November meeting are scheduled for Tuesday 17 November at 11:30am AEDT. They should give more detail on the majority's case for tightening and the minority's case for holding. The ABS Wage Price Index for the September quarter is scheduled for Wednesday 18 November, followed by October labour-force data on Thursday 19 November, both at 11:30am AEDT. These dates and times come from the official release calendars and can change.

The bottom line

The RBA has chosen to accept slower growth to protect its inflation target. The IMF's outlook shows that the global energy shock is uneven: energy-importing economies outside the technology supply chain face a harder outlook. Australia's households and Sri Lanka's public finances illustrate different channels through which that cost can be felt. Whether a 4.85 per cent cash rate is enough remains open. The RBA Board says it will respond to incoming data and the changing outlook, rather than committing to a fixed path of future decisions.