Breaking: RBA lifts interest rates to highest level in 18 years to try to dampen inflation - ABC News & Headlines – Australian Broadcasting Corporation

The RBA's monetary policy board has increased interest rates for the fifth time in 2026. (Reuters: Jason Reed)

The Reserve Bank's monetary policy board has lifted interest rates by 0.25 percentage points.

The decision lifts the cash rate target to 4.85 per cent, up from 4.60 per cent. It is the highest cash rate since late 2008.

It is the fifth interest rate increase in 2026, and the RBA has left the door open for more rate hikes.

The Reserve Bank has lifted interest rates to their highest level in 18 years, while acknowledging it will take much longer to drag inflation down than it was expecting a few months ago.

It has increased rates by 0.25 percentage points, which lifts the cash rate target to 4.85 per cent, up from 4.60 per cent.

The cash rate has not been this high in Australia since late 2008. It is the fifth time the bank has lifted rates in 2026.

The RBA board's decision to lift rates was not unanimous.

Six members voted to increase the cash rate target by 25 basis points to 4.85 per cent, while three members voted to leave the cash rate target unchanged at 4.60 per cent.

The majority decision will be another blow to households with mortgages.

But individuals who have high-interest savings accounts will see their savings accruing more interest after today's decision, if their bank applies higher rates to their accounts.

In a statement, the RBA board said inflation was now forecast to remain high throughout much of 2027 and was not expected to fall below 3 per cent until late 2027, which is "around three quarters later than previously forecast".

"This presents upside risks to inflation expectations," it said.

In recent weeks, RBA officials have been signalling their intention to lift rates at today's meeting, arguing that they can not afford to see peoples' inflation expectations drift higher.

The RBA wants annual inflation in consumer prices to be around 2.5 per cent on average over the cycle.

"There is an increasing share of businesses who are thinking that maybe 3 to 3.5 per cent is the new normal [for inflation]," RBA deputy governor Andrew Hauser warned last month.

It takes between 12 and 18 months for a change in interest rates to flow completely through the economy, so we will not know what total impact this rate hike will have on economic activity until 2028.

The RBA Monetary Policy Board said the cumulative rate hikes this year have tightened financial conditions in Australia.

It says the economy is slowing, housing prices have fallen significantly this year, and the unemployment rate has risen.

Its new economic forecasts see growth in output slowing even further over the coming year, which is expected to reduce capacity pressures and help return inflation to target. 

It says employment is expected to keep growing, but the unemployment rate is projected to rise by more than expected.

In August, it was forecasting the unemployment rate to average 4.8 per cent in the December quarter of 2028, but now it is forecasting it to average 5.1 per cent in that period.

The unemployment rate is currently 4.7 per cent.

But the RBA Board has also acknowledged that there continue to be "heightened uncertainties" about the outlook for inflation and the economy.

"The Middle East conflict remains unresolved, and there are scenarios where inflation is higher and activity lower than forecast," it warned.

"Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation.

"A period of prolonged uncertainty may also cause growth to be lower overseas and in Australia.

"To date, however, growth in Australia's major trading partners has been stronger than expected, as the boost from AI-related investment has outweighed the adverse effects of the Middle East conflict," it said.