The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.85% on Tuesday, its fifth increase of 2026 and the highest level since 2008. The decision was far from unanimous, though: six board members voted to hike and three preferred to hold at 4.60%, a split that tempers the hawkish signal.
The board said inflation remains elevated and broadly based, and that staff forecasts have been revised materially higher. Inflation is now expected to stay above 3% over the coming year and not to reach the top of the 2% to 3% target band until late 2027, about three quarters later than previously forecast. Higher fuel and commodity prices linked to the Middle East conflict are part of the story, but the RBA also judged domestic capacity pressures to be a little tighter than thought. It noted that firms are passing on costs and that some measures of inflation expectations have risen. AI-related investment is driving rapid price growth in technology goods.
The board also acknowledged that its tightening is biting. The economy is slowing, house prices have fallen significantly and unemployment has risen, with the jobless rate now projected to climb further than expected in August. Weaker housing and consumer spending are expected to be partly offset by stronger business investment, including in data centres. Uncertainty remains high, with the RBA flagging scenarios in which inflation runs higher and growth weaker than forecast.
On guidance, the board stopped short of signalling further hikes, saying it will be attentive to the data and do what is necessary to return inflation sustainably to target.
For markets, the combination of a well-flagged hike, a three-member dissent and no explicit tightening bias leans against a strong rally in the Australian dollar. It sits closer to AMP’s hike-and-hold view than to ANZ’s warning of a move to 5.10%, leaving Governor Michele Bullock’s press conference as the next test.
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Background to this:
- RBA set for fifth hike of 2026 to 4.85%: three views on what comes next
- Deutsche Bank stands alone with RBA hold call as 31 of 32 economists tip a hike
- JPMorgan joins hike call for RBA’s November meeting, sees tightening bias persisting
- RBA set for fifth 2026 hike to 4.85% as banks flag risk of another move in February
- ING lifts AUD/USD target to 0.71 as it backs a 25bp RBA hike next week
- RBA set for back-to-back hike after hot CPI, says Natixis’ Garcia Herrero
This article was written by Eamonn Sheridan at investinglive.com.