The Reserve Bank of Australia (RBA) lifted its cash rate to 4.85% Tuesday, tightening policy as its forecasts showed inflation staying above target longer than previously expected.
The Monetary Policy Board voted 6-3 for a 25-basis-point increase; three members favored keeping the rate at 4.60%. The RBA expects inflation to exceed 3% over the coming year and reach the upper limit of its 2%-3% target range only in late 2027, about three quarters beyond its prior estimate. The move follows the board’s September rate increase to 4.60% on Sept. 29, effective Sept. 30.
The bank attributed the changed outlook partly to fuel and other commodity costs linked to the Middle East conflict. It also judged domestic capacity pressures to be tighter than previously assessed. AI-related investment is pushing technology-goods prices higher, while firms report cost pressures and say they have raised prices or are considering doing so.
Financial conditions have tightened since the start of the year. The RBA reported weaker economic momentum alongside significant home-price declines and a higher unemployment rate. It expects higher interest rates and declines in housing prices and turnover to weigh on growth in household consumption and dwelling investment.
Employment is forecast to keep growing, but unemployment is projected to rise more than the RBA expected in its August forecasts. Overall business investment, by contrast, is forecast to grow more strongly in the near term, including investment related to data centers.
The board will use incoming data and its assessment of the outlook and risks to guide future decisions. It noted that the Middle East conflict remains unresolved and that energy supply disruptions are putting upward pressure on prices; prolonged uncertainty could also weaken economic activity in Australia and overseas.