RBA lifts interest rates to highest level in 18 years!

(Gareth Hutchens’s post from the ABC NEWS AUSTRALIA on 03 November 2026.)

RBA lifts interest rates to highest level in 18 years to try to dampen inflation: The RBA's monetary policy board has increased interest rates for the fifth time in 2026.  

The Reserve Bank has lifted interest rates to their highest level in 18 years, while acknowledging it will take much longer to drag inflation down than it was expecting a few months ago. It has increased rates by 0.25 percentage points, which lifts the cash rate target to 4.85 per cent, up from 4.60 per cent.

The cash rate has not been this high in Australia since late 2008. It is the fifth time the bank has lifted rates in 2026. RBA officials argue the hit to borrowers' income isn't the main way rate rises lower inflation. But they often omit a key fact.

The RBA board's decision to lift rates was not unanimous. Six members voted to increase the cash rate target by 25 basis points to 4.85 per cent, while three members voted to leave the cash rate target unchanged at 4.60 per cent.

The majority decision will be another blow to households with mortgages. But individuals who have high-interest savings accounts will see their savings accruing more interest after today's decision, if their bank applies higher rates to their accounts.

In a statement, the RBA board said inflation was now forecast to remain high throughout much of 2027 and was not expected to fall below 3 per cent until late 2027, which is "around three quarters later than previously forecast".

"This presents upside risks to inflation expectations," it said. In recent weeks, RBA officials have been signalling their intention to lift rates at today's meeting, arguing that they can not afford to see peoples' inflation expectations drift higher.

The RBA wants annual inflation in consumer prices to be around 2.5 per cent on average over the cycle. "There is an increasing share of businesses who are thinking that maybe 3 to 3.5 per cent is the new normal [for inflation]," RBA deputy governor Andrew Hauser warned last month. "That is the central banker's nightmare. We can't allow expectations to shift away from the target," he said.

It takes between 12 and 18 months for a change in interest rates to flow completely through the economy, so we will not know what total impact this rate hike will have on economic activity until 2028.

Economy slowing, house prices falling, unemployment rising

The RBA Monetary Policy Board said the cumulative rate hikes this year have tightened financial conditions in Australia. It says the economy is slowing, housing prices have fallen significantly this year, and the unemployment rate has risen.

Why are Australians obsessed with property? Because we have to be. And there are big reasons why it's always on our minds. Its new economic forecasts see growth in output slowing even further over the coming year, which is expected to reduce capacity pressures and help return inflation to target.

It says employment is expected to keep growing, but the unemployment rate is projected to rise by more than expected. In August, it was forecasting the unemployment rate to average 4.8 per cent in the December quarter of 2028, but now it was forecasting it to average 5.1 per cent in that period. The unemployment rate is currently 4.7 per cent.

But the RBA board has also acknowledged that there continue to be "heightened uncertainties" about the outlook for inflation and the economy. "The Middle East conflict remains unresolved, and there are scenarios where inflation is higher and activity lower than forecast," it warned.

"Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation. A period of prolonged uncertainty may also cause growth to be lower overseas and in Australia.

"To date, however, growth in Australia's major trading partners has been stronger than expected, as the boost from AI-related investment has outweighed the adverse effects of the Middle East conflict," it said.

Is the RBA pushing the economy into recession?

In her post-meeting press conference, RBA governor Michele Bullock left the door open for more rate increases. She was then asked if the RBA was risking pushing Australia's economy into recession with more rate hikes.

The Reserve Bank doesn't want consumer prices to come down, but to rise more slowly. It's a common misunderstanding that the ABS is partly responsible for. "I want to be absolutely clear here," Bullock replied.

"The board's dual mandate is still in play here. We are not looking to tip the economy into recession if we can avoid it. But we do need to get inflation down, and we do have excess demand at the moment, so that is the key." She said the RBA's new central forecast did not see Australia's economy falling into recession, but it did see economic growth slowing "markedly".

"It shows that inflation is quite sluggish, and I think that is going to … make people feel like it's a recession because they feel poorer, [and] their spending can't grow very quickly because their incomes aren't growing very quickly. This is a manifestation of lack of productivity growth and the fact that we've had this massive supply shock imposed upon us and we're all poorer," she said.

Are more rate hikes coming?

Some economists say the RBA may lift rates once more. "Will a 4.85 per cent cash rate be enough? Sadly, it's still hard to be definitive at this point," BetaShares economist David Bassanese said.

"In fact, two further rate hikes in the first half of next year can't be ruled out to ensure a decent slowing in domestic demand and containment of inflation expectations. My base case is the RBA will raise rates again in February 2027.

"At the least, having now raised rates in both September and November, the RBA will likely feel able to leave rates on hold at the last policy meeting of the year next month, offering under-pressure households at least a Christmas reprieve," he said.

EY chief economist Cherelle Murphy says the RBA is likely to take a wait-and-see approach over summer to allow the impact of the recent hikes to flow through the economy. "With the cash rate at its highest level in almost two decades, it is likely that policy is sufficiently restrictive to return inflation sustainably to target," she said.

"But further increases in rates are possible, if the board thinks the tightening in conditions are unable to get inflation back to target in a reasonable time frame."