RBA lifts rates to 18-year high as businesses flag further price rises

Marina Karpathios
04:00pm November 04 2026

Businesses are preparing further price rises and inflation is set to stay high well into 2027. But there are signs this could be the peak for interest rates. (Image: Pexels) 

The last time the cash rate was this high, the iPhone had just landed, Aussies were still hiring DVDs at Blockbuster and the nation was in the throes of the Global Financial Crisis.  

That was November 2008 and the Reserve Bank (RBA) was racing in the opposite direction, slashing rates on Cup Day by 75 basis points to 5.25 per cent.

Eighteen years on, the race is running the other way. The tech gadget du jour is still an iPhone (now in a decidedly nostalgic flip format), consumer sentiment is at recession-level lows and the RBA lifted the cash rate by 25 basis points to 4.85 per cent.  

Markets - and punters - alike mostly predicted the Cup Day increase yesterday after weeks of not-so-subtle warnings from the central bank that inflation was proving harder to rein in than anticipated. 

What was more telling was the monetary board's predictions on how long the high-rate environment would remain - and the reasoning for their move. 

In the eyes of the RBA, the state of the economy is a mosaic of uncomfortable elements, including businesses contemplating further price rises, consumers already spending less, unemployment heading higher and inflation refusing to retreat. 

The result is an increasingly difficult catch-22 for the RBA. The economy is slowing, yet inflation is now expected to remain elevated through much of 2027 and reach the top of the Bank's 2 to 3 per cent target range only in late 2027, around nine months later than previously forecast. 

As for premonitions for the coming year, RBA Governor Michele Bullock was unusually blunt. Higher inflation was, to a considerable extent, already “baked in”. 

“We can’t do much about the next year,” Bullock told reporters. “It’s not a good situation to be in, we’re very uncomfortable with it.” 

Why raise rates if oil is the problem? 

Global oil prices have risen following the Middle East conflict and fuel feeds into many economic costs, from transporting groceries to running machinery. The RBA, however, is cognisant that changing an Australian interest rate will not produce another barrel of oil. 

To that point, Bullock was explicit, “monetary policy cannot impact global oil prices.” Instead, she and her colleagues are worried about what happens next. 

Bullock said businesses were already raising prices or considering doing so as they looked to pass higher fuel costs on to customers. 

The longer inflation remains high, she said, the greater the likelihood businesses will try to recover those costs from customers. 

That gets to the heart of the latest rate rise - the RBA believes there was already too much demand relative to the economy's capacity to supply goods and services before the latest oil shock arrived. It now thinks that imbalance was larger than previously estimated. 

The curious case of the AI boom 

There is another, very 2026, complication: artificial intelligence. 

Investment has been stronger than the RBA expected, helped by spending on data centres, while the AI boom is driving demand for technology-related goods globally. 

The hoped-for productivity dividend from AI has yet to arrive in the RBA’s forecasts, while the spending required to build the infrastructure is happening now. 

In her post-decision assessment, Westpac Chief Economist Luci Ellis noted the RBA's forecasts assume no AI-related improvement in productivity through 2028. 

That leaves AI appearing in the RBA's current calculations mainly as another source of demand and inflation pressure, rather than as a technology that expands the economy's productive capacity. 

The price of getting inflation down 

Meanwhile, the medicine is already working its way through the economy. 

Spending has slowed, housing prices have declined and labour market conditions have eased. The RBA expects the unemployment rate to rise further, reaching 5.1 per cent by the end of 2028, according to its latest forecasts. 

Bullock said growth would need to remain subdued and the labour market “ease further” for demand and supply to return to balance. 

For households, she acknowledged the burden extends well beyond people with mortgages. 

“Every household is dealing with higher prices for groceries, electricity, insurance and other essentials,” Bullock said, adding that inflation was particularly painful for lower-income households, including renters with little or no savings. 

“When most of your income is already going towards essentials, there is nowhere left to cut spending.” 

Was this the last hike? 

The decision wasn't unanimous - six Board members voted for the increase, while three wanted to leave the cash rate at 4.60 per cent. 

And yet, now five rate rises into 2026, Bullock described this point a good time to "take stock". She noted earlier increases could take 12 months or longer to have their full effect. 

One silver lining for mortgage holders was the slight change in tone in the RBA's latest statement - Westpac notes that the RBA dropped September's explicit reference to “increasing the cash rate target further if needed”. 

Ellis reads that comment, together with the three dissenting votes, as pointing towards a pause in December.  

Westpac's base case is that 4.85 per cent marks the peak, although Ellis sees another increase as a risk rather than the most likely outcome. 

The wait for lower inflation looks more certain to be a long one. The RBA now expects it to remain elevated through much of 2027. 

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