The Reserve Bank has lifted interest rates to a 15-year high to combat stubborn inflation and has not ruled out further hikes despite rising unemployment, falling house prices and sluggish economic growth.
The bank’s monetary policy board decided unanimously to raise its benchmark cash rate by 0.25 of a percentage point to 4.6 per cent on Tuesday, adding more than $90 a month to repayments on a typical $600,000 mortgage with 25 years remaining.
The increase means Australia now has one of the highest official interest rates set by a central bank among western economies, surpassing the US (where official rates are 4 per cent) and UK (3.75 per cent).
In a statement, the RBA board left the door open for additional interest rate increases, saying it will “continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed”.
The board said previously flagged “upside risks” to inflation were now materialising, citing the fallout from war in the Middle East, the AI boom and prices surges across the economy.
“There have been further disruptions to global oil supply and recent data suggest that growth and inflation in Australia have been higher than expected,” the board said. “Higher fuel prices have partially been passed through to prices of other goods and services. This inflation impulse is in addition to the effect of capacity pressures in the economy.”
The board acknowledged the housing downturn, noting that “weak productivity growth continues to constrain potential growth and there are uncertainties about the economic effects of the downturn in the housing market”.
The last time Australia’s cash rate was above 4.5 per cent was October 2011. However, the amount of outstanding mortgage debt has more than doubled since then. The total value of residential mortgages in 2011 was $1.05 trillion, but that has since climbed to $2.51 trillion, according the Australian Prudential Regulatory Authority.
The RBA has now lifted interest rates by 1 percentage point over four separate increases this year in a bid to reduce inflation.
Price pressures have been stoked by elevated fuel prices caused by the Middle East conflict, which has dragged on since February and continues to disrupt global oil supplies. Average petrol prices in Australia have risen well above the $2-a-litre mark in the past month, putting pressure on the Albanese government to revive the fuel excise cuts that subsidised the cost for four months from April through July this year, and spurring other price rises as firms pass on this cost.
Treasurer Jim Chalmers said on Tuesday that it was abundantly clear that war in the Middle East had “turbocharged” inflation.
“[But] we do take responsibility for our part of the fight against inflation. That’s why we will continue to manage the budget in a responsible way, roll out cost-of-living help in a responsible way, and deal with these longer-term challenges as well.”
Chalmers acknowledged that Australians were paying “a very hefty price” over inflation while refusing to say whether he believed there would be another rate rise this year.
Opposition Leader Angus Taylor described Tuesday as a “dark day” for mortgage holders.
“This is avoidable,” Taylor said. “The current interest rates are a result of Labor’s actions. We know that this is a government that is spending too much.”
The RBA’s decision follows a volatile period of international bond markets as global interest rates climb to two decade highs amid concerns about higher inflation and geopolitical risk.
Australia’s inflation rate is currently 3.5 per cent and has been above the RBA’s target band of 2 to 3 per cent for much of the past five years. Reserve Bank officials have repeatedly expressed concern that expectations of elevated inflation have becoming more entrenched among business and consumers.
Last month the unemployment rate reached 4.6 per cent, the highest rate in nearly five years, but the deterioration in the labour market was not enough to deter the RBA from lifting interest rates. Reserve Bank governor Michele Bullock warned last week the jobless rate may need to rise as high as 5 per cent to ease pressure on inflation.
Higher interest rates will hit a housing market already weakened by higher borrowing costs and federal tax changes. Figures released in early September by property analytics firm Cotality showed house values have fallen for five consecutive months.
The Australian stock market was down very slightly after the RBA met expectations and raised the cash rate to 4.6 per cent, up 25 basis points, on Tuesday afternoon.
The ASX 200 index had been trading at 8690, up about 0.11 per cent for the day, at 2.20pm AEST.
At 2.32pm, just after the rates call, the index was at 8675, down 0.04 per cent.
The central bank’s decision had been widely expected among market watchers and investors.
Ahead of the decision, AMP chief economist Shane Oliver said he expected the bank to continue warning of further rate hikes, but that the tone may shift later in the year.
“After more than five years of inflation being above target, threatening RBA credibility, it does not have the luxury of continuing to ‘wait and assess’,” he said. “By the time it gets to the November meeting, there is likely to be more evidence of a cooling economy, falling home prices, a softer jobs market and rising recession risks – so we don’t think a second hike let alone a third will be necessary.”
Oliver said rate hikes and higher petrol prices have raised the additional monthly costs for an average household by $530 a month since January for those with a mortgage and petrol car, which he said was “quite a hit”.
The economy grew by 2.1 per cent last financial year, but gross domestic product per person rose by a more subdued 0.7 per cent. The Reserve Bank is forecasting growth the slow to 1.5 per cent in the year to June 2027.
Inflation peaked at nearly 8 per cent at the end of 2022 but then fell back to the RBA’s 2 to 3 per cent target range for a period in 2024 and 2025. However, it picked up in the second half of 2025 and has remained above the target since.
Bullock and other RBA officials have said repeatedly the bank is focused on getting inflation back into the 2 to 3 per cent band.
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Millie Muroiis the economics writer at The Sydney Morning Herald and The Age covering workplace and economics. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect viaXoremail.
