Reserve Bank lifts cash rate to 4.85 percent, an 18-year high, in a six-to-three split decision

The Reserve Bank of Australia has lifted its cash rate target by 25 basis points to 4.85 percent, the fifth increase this year and the highest level since late 2008, as it fights broadly based inflation that it now expects to remain above its target band until late 2027. The November 3 decision was not unanimous: six members of the Monetary Policy Board voted for the rise while three voted to leave the rate unchanged at 4.60 per cent, and the board left the door open to further increases, saying it would continue to do what it considers necessary to bring inflation sustainably back to the 2-3 per cent target.

Why the board tightened again

In its statement, the board said inflation remains elevated and recent data show it is broadly based, with the outlook revised materially higher in updated staff forecasts. That partly reflects higher fuel and other commodity prices affected by the Middle East conflict, but domestic capacity pressures were also judged to be a little tighter than earlier thought, and investment related to artificial intelligence is driving rapid growth in prices for technology-related goods. The bank's liaison programme indicates many firms are experiencing cost pressures and are raising, or looking to raise, their prices. Inflation is now forecast to remain elevated through much of 2027 and not to reach the top of the target range until late 2027, around three quarters later than previously forecast, presenting upside risks to inflation expectations, some measures of which are assessed to have risen lately.

The board noted that this year's increases have tightened financial conditions: the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen. Forecasts see output growth slowing further over the coming year, which is expected to reduce capacity pressures, while higher rates and falls in housing prices and turnover are expected to weigh on dwelling investment and household consumption; business investment, including data centre construction, is forecast to be stronger in the near term. The bank cited heightened uncertainties, including the unresolved Middle East conflict, scenarios where inflation is higher and activity lower than forecast, and weak productivity growth that continues to constrain the economy's potential. Governor Michele Bullock said after the decision that the tightening will make people feel poorer, since their spending cannot grow quickly when their incomes are not growing quickly, while saying the central forecast did not show a recession, even though growth would slow markedly.