EL7.AI
Central BanksMedium•3 November 2026•
5 min read

Australia Raises Rates to 4.85% as Inflation Return to Target Delayed Until 2028

Key Facts

1The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.85% on 3 November 2026.
2The bank expects headline and underlying inflation to remain above 3% through the end of 2027, with inflation returning to the midpoint of the 2–3% band in mid-2028.
3The bank forecast headline inflation peaking at 4.5% in the December quarter of 2026.
4Six members voted to raise rates, while 3 preferred to hold them at 4.60%.
5The Australian dollar fell 0.3% to $0.6979 after the decision.

The Reserve Bank of Australia raised its cash rate target by 25 basis points to 4.85% at its meeting on 3 November 2026, a move the bank said came amid ongoing and broadening inflationary pressures. The Monetary Policy Board said in its statement that headline and underlying inflation would remain above 3% through the end of 2027, before inflation returned to the midpoint of the 2–3% target band in mid-2028. That delays a return to the midpoint compared with the August forecasts, with the bank now seeing prices taking longer to stabilise. The decision highlights the bank’s balancing act between containing inflation and an expected slowdown in economic growth. The bank also said the Middle East conflict remained unresolved and that higher energy prices added risks to its outlook.

In its new forecasts, the bank said headline inflation could peak at 4.5% in the December quarter of 2026, then remain above 3% until late 2027, around three additional quarters compared with its August estimates. It also expected underlying inflation to remain above 3% through the end of 2027, and said the midpoint of the target band would not be reached before mid-2028. In a separate forecast for trimmed mean inflation, the bank put the figure at 2.5% in June 2028, up from 2.4% in its August forecast for the same period. These estimates reflect an upward revision to the price path compared with previous forecasts. The bank said the latest inflation data confirmed that pressures had broadened, and that domestic capacity pressures were slightly stronger than previously estimated.

The bank linked the forecast revisions to a higher path for energy prices amid the Middle East conflict, and to intensifying energy and domestic capacity pressures. It also said investment related to artificial intelligence was driving rapid growth in prices for technology-related goods. In its decision statement, the bank said, "Investment related to artificial intelligence is driving rapid growth in prices for technology-related goods." It added that there were signs higher fuel prices were being passed through to the prices of other goods and services. The concern went beyond fuel’s direct impact: the bank said domestic capacity pressures were slightly stronger than previously estimated, broadening the sources of price pressure. The bank’s report said retail fuel prices made the largest contribution to the upside surprise in headline inflation.

Australian Bureau of Statistics data show the consumer price index rose 4.3% year on year in September, compared with a 4.0% increase in August. Annual trimmed mean inflation was 3.6% in September, according to the bureau, which said fuel was excluded from the measure that month and was a key reason headline inflation differed from underlying inflation. In its quarterly report, the bank said trimmed mean inflation rose 1.0% in the September quarter, from 0.8% in the June quarter, reaching 3.7% year on year. The report also attributed much of the upside surprise in headline inflation to retail fuel prices. The readings show the differing impact of fuel on the headline index and the underlying inflation measure, which excludes some volatility.

The decision was backed by 6 members, who supported raising the cash rate target by 25 basis points to 4.85%, while 3 members preferred to leave it at 4.60%. The result showed a split within the board over the need for further tightening to confront inflation. Before the decision, overnight index swaps pricing implied an 85% probability of a November rate increase, with about one and a half increases priced in by mid-2027. After the announcement, the Australian dollar fell 0.3% to $0.6979, and three-year government bond futures fell 3 points to 95.14. The market leaned toward a rate hold in December, according to a Reuters report.

On growth, the bank cut its forecast for annual GDP growth in December 2027 to 1.3% from 1.6% in its August estimates, and lowered its December 2028 forecast to 1.5% from 1.8%. The bank attributed constraints on growth to global energy prices being higher than expected, a weak housing market, and an assumed higher path for interest rates than in its August forecasts. It said strong data-centre investment would only partly offset these factors. The bank expected the unemployment rate to rise to 5.1% by the end of 2028, a quarter of a percentage point higher than its previous forecast. The inflation forecast revisions therefore accompany a weaker growth outlook and an expected rise in unemployment in the labour market.

The bank’s board said it would be guided by the data and its evolving assessment of the outlook and risks in making future decisions, and would continue to do what it considered necessary to return inflation to target sustainably. It said the Middle East conflict remained unresolved and that some scenarios could combine higher inflation with weaker-than-expected economic activity. Energy prices and disruptions to oil supplies remained among the risks cited in the bank’s assessment. At the same time, it expected monetary policy tightening to keep GDP growth below its potential, with spare capacity emerging in the labour market during 2027. The bank said the board "will pay attention to the data and its evolving assessment of the outlook and risks to guide its decisions."