RBA raises its rate to 4.85% in a 6-3 vote, pushing its inflation forecast to late 2027

The Reserve Bank of Australia (RBA) raised its cash rate target by 25 basis points to 4.85% on Tuesday, in a split decision: six members of its Monetary Policy Board voted for the rise and three voted to leave the rate at 4.60%, the central bank said. It was the second increase in successive meetings, after the Board held the rate at 4.35% in August and raised it to 4.60% on September 29.

A revised forecast, not a single data point, drove the vote

The Board said inflation "remains elevated and recent data indicate that it is broadly based" and that the outlook for it "has also been revised materially higher in the updated staff forecasts". Inflation is now forecast to stay elevated through much of 2027 and is not expected to reach the top of the 2-3% target range until late 2027, around three quarters later than previously forecast, according to the statement.

The RBA named several causes. Higher fuel and other commodity prices, affected by the conflict in the Middle East, are one. Domestic capacity pressures, which it now judges to be a little tighter than earlier thought, are another. A third is the effect of artificial intelligence spending on prices: "AI-related investment is driving rapid growth in prices for technology-related goods", the Board said.

The slowdown the Board is weighing against it

The statement describes an economy that is already cooling. "The economy is slowing, housing prices have fallen significantly and the unemployment rate has risen," the Board said, adding that the increases in the cash rate target since the beginning of the year have tightened financial conditions. It expects the unemployment rate to rise by more than it forecast in August, while growth in overall business investment is forecast to be stronger in the near term, including data center-related investment.

The Board also said the Middle East conflict remains unresolved and that there are scenarios in which inflation is higher and activity lower than forecast.

Three members wanted to wait

The Board's reasoning for acting was that, given the revised inflation outlook and the continuing upside risks, "a further tightening in financial conditions is warranted". The three members who voted against the rise wanted to leave the rate at 4.60%. The statement does not give their reasons or their names.

The Board said it will be attentive to the data and to the evolving assessment of the outlook and risks to guide its decisions. The statement gives no date or size for any further move.

We would read the 6-3 vote as a sign of how close the call was

This is the Economy desk's view. We think the RBA's reasoning is easier to defend than the vote makes it look: a forecast that puts inflation back at the top of its range only in late 2027 leaves little room to wait, and the Board itself says the risk is that higher inflation expectations become embedded. But three members chose to hold, at a time when the Board also reports falling housing prices and rising unemployment, so the decision rests on a forecast rather than on a clean break in the data.

The opportunity is that a quicker return of inflation to target would let the Board stop earlier than the forecast implies. The threat is that energy prices and AI-related price pressure prove more lasting than the RBA assumes, which would call for more tightening into a slowing economy. We expect the next meeting to turn on the unemployment rate and on the fuel-price pass-through the Board describes, and we would change our view if unemployment rises faster than the Board now forecasts. Central banks facing an energy shock are choosing between two imperfect options, and this decision shows how narrow that choice can be.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.