Australia Raises Interest Rates to an 18-Year High of 4.85%

Australia's central bank has lifted its cash rate to an 18-year high, raising borrowing costs for a fifth time this year even as a split vote inside the bank signalled the tightening campaign may be nearing its end. The Reserve Bank of Australia (RBA) raised the rate by 25 basis points to 4.85% on Tuesday, a level not seen since 2008, as it battles inflation that refuses to return to its target band.

The decision was not unanimous. The nine-member monetary policy board voted 6-3 in favour of the increase, with three members preferring to hold. That dissent matters: it was closer than many expected, and markets read it as a sign the bank is approaching a pause. The Australian dollar slipped 0.3% to $0.6979 after the announcement, and traders strengthened bets that the RBA will leave rates unchanged at its final meeting of the year on December 8.

Why the RBA moved again

Inflation is the whole story. Underlying inflation accelerated to a two-year high of 3.7% in the third quarter, according to Reuters, after spending more than five years above the bank's 2% to 3% target band. The bank's updated forecasts, reported by several outlets, now see headline inflation hitting 4.5% in the fourth quarter before easing back into the target band in the second half of next year — and warn of a growing risk that higher inflation expectations become embedded.

The 125 basis points of tightening delivered this year has more than reversed the 75 basis points of easing from 2025, putting Australia at the hawkish end of developed-market central banks. By contrast, the US Federal Reserve stayed on hold this month, and New Zealand's central bank surprised markets by pausing in a razor-thin vote. RBA governor Michele Bullock told reporters the bank was not expecting a recession, but declined to rule out further increases, and said it was unclear what the next move would be.

What it costs households

The pain lands quickly on mortgage holders. Lenders are largely expected to pass the hike on, and on a $750,000 home loan the increase alone adds around $120 a month to minimum repayments, according to Mortgage Choice. Cumulatively, the picture is starker: compared with January 2026, the average borrower with a $730,719 loan will pay $538 more per month — $6,460 more per year — if banks pass on the full November hike, according to Finder's survey of 40 economists. Finder notes that anyone who took out their first mortgage in the past 18 years has never seen a cash rate this high.

Unemployment is the counterweight. It has climbed to a five-year high, and the three dissenting board members placed greater weight on downside risks as the housing market weakened and joblessness rose, according to reports of the decision. The bank now forecasts unemployment climbing above 5% over the next two years — the tension at the heart of every rate decision: squeeze inflation without tipping the economy into recession in 2027, a risk some economists are now openly warning about.

What happens next

Two signals point in opposite directions. The bank removed a reference to increasing the cash rate further if needed — a dovish edit that markets seized on. But it also said it would continue to do what it considers necessary to bring inflation sustainably back to target, and its forecasts still show inflation above 3% for the coming year. Most economists in Finder's survey do not expect another hike after today; just over a quarter pencil one in for February 2027. Related reading: AI Stocks Lose $5 Trillion in October Rotation.

The December 8 meeting is now the one to watch. If inflation data cools, the split vote of November 3 may be remembered as the moment the hiking cycle ended. If it does not, borrowers face the prospect that 4.85% is not the peak after all. Sources: Reuters and Nikkei Asia.