RBA delivers expected 25bp rate hike to 4.85% in split vote

Tuesday saw the Reserve Bank of Australia push its cash rate up by another 25 basis points, to 4.85%, marking the fifth increase of 2026 and leaving the benchmark at its highest level since 2008. The vote behind the decision was not close to unanimous, however: six members of the board supported the move, while three argued for holding the cash rate at 4.60%, and that division softens the hawkish message.

Inflation is still high and broad-based, the board said, with staff projections revised up considerably. Under the updated projections, inflation is set to stay above 3% over the next year and will not get back to the top of the 2% to 3% band until late 2027, around three quarters later than the prior forecast. Rising fuel and commodity prices tied to the Middle East conflict account for some of the pressure, but the RBA also saw domestic capacity conditions as a touch tighter than it had earlier assumed. The board observed that companies are passing on cost increases and that several gauges of inflation expectations had moved higher. Investment linked to AI is driving fast price increases for technology goods.

The central bank acknowledged that its rate increases are starting to bite. Growth is losing momentum, house prices have fallen markedly and the unemployment rate has moved up, with the labour market now expected to weaken further than officials anticipated in August. A softer housing sector and weaker household spending should be at least partly balanced by more robust business investment, particularly in data centres. The RBA stressed that uncertainty is elevated, laying out scenarios in which inflation picks up more than projected and economic growth comes in below forecast.

As for the path ahead, the board refrained from signalling that more hikes are coming. It said it would keep a close eye on incoming data and would take whatever action is needed to return inflation to target on a sustainable basis.

For markets, the already well-flagged increase, the three dissenting votes and the absence of an explicit tightening bias argue against a strong Australian dollar rally. The outcome aligns more with AMP's hike-and-hold scenario than with ANZ's warning of a move to 5.10%, making Governor Michele Bullock's press conference the next test.