Australia hikes rates to 18-year high to fight inflation

Australia's central bank raised its benchmark cash rate by 25 basis points to 4.85% on Tuesday, the highest level since November 2008.

The Reserve Bank of Australia's move was in line with expectations from economists polled by Reuters, and marked its fifth rate increase this year.

In its statement, the RBA said that the move was a split decision, with six members voting for the increase and three opting for a hold.

This also comes as the country continues to grapple with high inflation, with the consumer price index rising 4.3% in September, up from 4% in August and marking its highest level since March.

The central bank also said inflation is now expected to "remain elevated through much of 2027," and not expected to fall back into its 2%-3% target range till late 2027, three quarters later than previously forecast.

This was due to higher fuel and other commodity prices, in addition to factors including AI-related investment, which is driving rapid growth in prices for technology-related goods, the RBA said.

In its September decision, RBA governor Michelle Bullock said that inflation is "too high," driven by higher oil prices from the Iran War and stronger domestic spending.

"We're seeing signs that upside risks to inflation are materializing," she added, saying that additional hikes will come "if that's what's needed to get inflation down."

Growth has slowed in the first two quarters of 2026. Australia's GDP rose 2.1% in the June quarter compared to a year earlier, down from 2.5% in the March quarter.

The RBA is trying to bring inflation back under control while higher borrowing costs and cost-of-living pressures weigh on households and activity.

When asked if she sees a recession for Australia, Bullock said that it is "not our base case at the moment."