By Karim Hammam
The Reserve Bank of Australia raised the official cash rate to 4.85% on Tuesday, an 18-year high, marking the fifth increase this year as the central bank battles persistent inflation. Governor Michele Bullock said the decision would cause "some pain now" but would prevent "even worse pain down the track."
Split Decision and Market Reaction
The monetary policy board voted six to three in favour of the hike, with three members preferring to hold rates steady. Financial markets subsequently halved the probability of another rise before Christmas to 12%, while pricing in a roughly 30% chance of a sixth hike by May. Economists at UBS described the removal of an explicit reference to further tightening in the post-meeting statement as "clearly dovish."
Impact on Households
The back-to-back increases will affect more than 3.3 million households with home loans. According to Canstar, the latest rise adds $107 to monthly repayments on a $700,000 mortgage, bringing the cumulative increase from this year's five hikes to $532 per month.
Political Responses
Treasurer Jim Chalmers attributed the inflationary surge primarily to higher fuel prices driven by the Middle East conflict, insisting government budgets were not adding upward pressure. Opposition leader Angus Taylor countered that Labor's spending was driving up inflation and interest rates, leaving Australians to pay the price.
Economic Forecasts
The RBA's latest Statement on Monetary Policy projects inflation peaking at about 4.5% by year-end and returning to the 2-3% target range only by late 2027, nine months later than previously hoped. Economic growth is forecast at 1.6% this year and 1.3% in 2027, well below the estimated 2% potential rate. Unemployment, currently 4.7%, is expected to reach 4.9% by end-2027 and exceed 5% in 2028. The bank sees no evidence of a recession over the next two years despite a housing downturn described as one of the steepest in 50 years.
