The Reserve Bank of Australia raised the cash rate target by 25 basis points to 4.85 percent on Tuesday, its fifth increase of 2026 and the outcome markets and all four major Australian banks had expected. The decision was not unanimous: six members voted for the increase and three voted to leave the target unchanged at 4.60 percent.
The board said inflation remains elevated and broadly based, and that the inflation outlook was revised materially higher in the updated staff forecasts. It pointed to higher fuel and other commodity prices affected by the conflict in the Middle East, domestic capacity pressures judged a little tighter than previously thought, rapid price growth in technology related goods driven by AI related investment, and liaison showing many firms facing cost pressures and raising prices, or looking to do so. Some measures of inflation expectations have risen lately, the board said, and there is an increasing risk that higher expectations become embedded.
The forecasts moved with the decision. Inflation is expected to remain above 3 percent for the coming year and to stay elevated through much of 2027, reaching the top of the 2 to 3 percent target range only in late 2027, about three quarters later than previously forecast. The board said cash rate increases since the beginning of the year have tightened financial conditions, the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen, with unemployment now projected to rise by more than expected in the August forecasts. Output growth is forecast to slow further over the coming year, weighing on dwelling investment and household consumption, while business investment growth is expected to be stronger in the near term, including data centre related investment.
The board said it will continue to do what it considers necessary to bring inflation sustainably back to target, and that it will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.