RBA Raises Interest Rates to Highest Level in 18 Years — Update

By James Glynn

SYDNEY--The Reserve Bank of Australia raised interest rates to their highest level in 18 years on Tuesday after "materially" revising up its inflation forecasts.

The official cash rate was raised by 25 basis points to 4.85%, the highest since 2008. The increase makes the RBA an outlier as other major central banks have chosen to pause in recent weeks.

The RBA's nine-member monetary policy board voted six to three in favor of an increase.

"Since the previous meeting, the data have confirmed that underlying inflation remains broadly based," the board said in a statement.

"Capacity pressures appear a little tighter than previously estimated and there are indications that higher fuel prices are being passed through to prices of other goods and services," it said.

Inflation is now expected to remain above 3% for the coming year with an increasing risk that higher inflation expectations will become embedded, the board said.

The decision follows data showing that consumer inflation has risen to more than 4.0% in the 12 months to September, moving away the RBA's target of 2.5%.

By raising interest rates for a fifth time since the start of the year, the RBA risks tipping the economy into a recession in 2027, sharply driving up unemployment and speeding business collapses.

RBA Governor Michele Bullock told reporters that the bank isn't expecting the economy to go into a recession, but equally she declined to rule out further interest rate increases.

Unemployment remains low and the economy is still creating jobs, so the RBA doesn't expect to hear the economy "crack," she added.

The RBA pointed to the war in the Middle East and an investment surge linked to artificial intelligence data centers as major forces driving up prices and fueling demand pressures.

Still, the decision also comes as house prices fall at their fastest pace in more than 40 years, something that is likely to curb consumer confidence and slow spending.

After months of hawkish commentary from senior RBA staff, policymakers left open the possibility that interest rates could be raised further.

"The board will continue to do what it considers necessary to bring inflation sustainably back to target," it said. However, it also highlighted its dual mandate of price stability and full employment.

The pace of interest rate increase is putting immense pressure on the Labor government in Canberra to cut spending. Treasurer Jim Chalmers has indicated the government will announce cuts at the mid-year review of its budget, expected in December.

The Australian dollar initially rallied above 70 U.S. cents on the decision, before falling back to around 69.75 U.S. cents.

Sean Callow, senior currency strategist at ITC Markets, said the selling may have been triggered by news that the vote to hike was split. Market pricing for a further hike in December also weakened to near zero.

-- Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

November 03, 2026 00:32 ET (05:32 GMT)