RBA raises rates to 4.85% on a split 6-3 vote and trims its 2027 growth forecast

The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.85% on Tuesday, the highest level since 2008, after “materially” revising up its inflation forecasts¹. The board split 6-3 on the decision³. It was the fifth rate increase of the year⁶, and it takes rates to an 18-year high².

The bank lowered its forecast for GDP growth to December 2027 from 1.6% to 1.3%, and raised its unemployment projection from 4.7% to 4.9%³. In its Statement on Monetary Policy, the RBA said GDP growth has slowed and is expected to remain below its estimate of potential throughout the forecast period⁹.

Why it matters to investors

The decision puts Australia out of step with the largest central banks. The US Federal Reserve, the European Central Bank, the Bank of Japan and the Reserve Bank of New Zealand have all left rates on hold recently^2,8.

Governor Bullock said the bank’s central forecast does not see Australia entering a recession, though she acknowledged that growth will slow sharply^4,6. She also warned that households face recession-like pain⁵. Even without a recession in the central forecast, households are expected to feel the strain^4,5.

Some economists are gloomier than the bank. The RBA’s 1.3% growth forecast for 2027 is more optimistic than those of economists at NAB and Commonwealth Bank¹⁰. Unemployment has already climbed from 4.0% to 4.7%, enough to trigger an Australian version of the “Sahm rule”, which signals recession⁷. Commentary has warned that the bank risks a 90s-style slump as rate hikes struggle for traction⁷.

What to watch

Markets are clinging to the hope that this is the peak, with some describing Tuesday’s move as possibly the last increase of the cycle⁸. The three dissenting votes expose a policy divide inside the board³, which will shape how investors read the next meeting.

The bank’s own forecasts set the test: weaker growth, rising unemployment and an inflation outlook that it revised higher^1,3. The gap between the RBA’s view and the more pessimistic bank economists¹⁰ is the main risk for the Australian dollar and local bond yields as the data arrive.