RBA decision: Fifth hike of 2026
As widely expected, the RBA this afternoon raised the cash rate by 0.25% to 4.85% – its fifth hike this year and the highest cash rate since November 2008.
That marks 1.25% of tightening since February, more than reversing the 0.75% worth of rate cuts delivered last year. Interest rates could now be considered at moderately restrictive levels.
Why the RBA moved: Risks ‘materialising’
The decision to raise rates reflected the materialisation of inflation risks the RBA identified a few months ago. Back in August, the RBA forecast that trimmed mean – or underlying – inflation would rise 0.8% in the September quarter. As it turned out, the rise was 1.0%, a “materially worse” outcome to use the words of Deputy RBA Governor Andrew Hauser.
Two sources of inflation are global in nature, so beyond the direct control of either the Reserve Bank or State and Federal Governments.
Due to the ongoing conflict in Iran and the blocking of oil flows through the Strait of Hormuz, oil prices have moved higher in recent months. Higher petrol prices directly add to headline inflation but also affect underlying inflation as higher transport costs are passed through into the prices of a wide range of goods and services.
The artificial intelligence (AI) investment boom is another global factor. The rapid increase in spending on AI-related data centres has increased the demand for labour and raw materials across the globe and bid up the price of many electrical components that go into personal computers and mobile phones.
That said, some of today’s current inflationary pressure is homegrown. Although economic growth is slowing and the unemployment rate has increased over the past year, the level of demand is still considered high relative to available supply capacity. Weak growth in productivity, or output per worker hour, is not helping.
Firm demand and capacity constraints have been reflected in still sticky inflation in both the housing sector and a range of market services, such as restaurant and take-away meals. As the RBA noted in its Statement today, “liaison indicates that many firms are experiencing cost pressures and are either increasing the prices of their goods and services in response or looking to do so.”
Even though the RBA cannot stop inflation arising from the Iran war and AI boom, it can seek to limit the overall increase in inflation by dampening down on locally generated price pressure where it can – through higher interest rates that weaken demand.
The RBA’s concern is that the longer inflation stays above its 2 to 3% target band, the greater the risk that business and household inflation expectations adjust higher – making it even harder to dampen inflation without a more serious economic downturn or even recession.
Indeed, the RBA has revised up its inflation outlook in its updated set of forecasts. It now expects inflation “to remain elevated through much of 2027 and is not expected to reach the top of the 2-3 per cent target range until late 2027, around three quarters later than previously forecast”.
According to the Bank, “this presents upside risks to inflation expectations; some measures are assessed to have risen lately”.
What happens next – is five enough?
Will a 4.85% cash rate be enough? Sadly, it’s still hard to be definitive at this point.
In terms of external forces, both the Iran war and the AI boom seem likely to remain upside inflation risks for the foreseeable future. In bittersweet news, the best hope of a near-term slowing in inflation rests on weaker local economic growth, which higher interest rates are slowly but surely helping to bring about.
At present, both higher interest rates and weaker house prices are squeezing household income and wealth, which in turn should result in softer consumer spending and housing activity in the months ahead. That said, fuelled by the AI boom, business investment is expected to remain firm and neither State nor Federal Governments seem prepared to significantly curtail public spending anytime soon.
As a result, given the elevated near-term inflation outlook and the likely ongoing global sources of inflationary pressure, at least one more rate rise seems likely. 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.
