Australia Raises Rates to 4.85% in a 6–3 Split: Underlying Inflation Backs the Hike, a Cooling Labour Market Tests It

The Reserve Bank of Australia (RBA) raised interest rates again on 3 November 2026, lifting its cash rate target from 4.60% to 4.85%. It is the fifth quarter-point increase of 2026, taking the rate 1.25 points above where it started the year. The Bank said underlying inflation remains elevated and broadly based, and that higher fuel and commodity prices linked to the Middle East conflict have pushed its inflation forecasts up.

The decision was not unanimous. Six of the nine members of the Monetary Policy Board voted for the increase and three voted to hold. The split matters because the economy is slowing: unemployment has risen, employment fell in September and housing prices have dropped since March. The question is whether the RBA is responding to inflation that is already in the system, or tightening into a downturn.

What the RBA decided and why

The Board judged that a further tightening in financial conditions is needed to bring inflation back to target, and said it will be guided by incoming data and its assessment of the outlook and risks.

Its updated forecasts, published the same day in the November Statement on Monetary Policy, have headline inflation at 4.5% over the year to the December quarter of 2026, the highest point in its forecast table. The Bank does not expect inflation to fall to the top of the target range until late 2027, about three quarters later than it previously forecast. Trimmed mean inflation, the RBA's main gauge of underlying inflation, is forecast at 2.9% for the December quarter of 2027 and 2.5%, the midpoint of the target range, around mid-2028.

The Bank pointed to three sources of pressure. Fuel prices have risen with the conflict and have partly passed through to other prices. The economy is still judged to be running a little above capacity. And investment in artificial intelligence is raising prices for technology goods: the RBA notes that higher memory-chip costs have pushed up prices for computers, televisions and gaming consoles. It also flagged that some measures of inflation expectations have risen.

These forecasts are projections, not outcomes. The RBA's own historical error bands are wide: by the end of 2028, its 90% band for trimmed mean inflation spans roughly 0.5% to 4%.

The inflation data

The fuel shock is visible in the headline figure: automotive fuel prices rose 9.4% in September alone and were 23.6% higher than a year earlier. Electricity was up 12.8% over the year, mainly because Commonwealth electricity rebates ended. But the Australian Bureau of Statistics (ABS) notes that fuel was excluded from the trimmed mean in September, which is a key reason headline and underlying inflation differ. Underlying inflation is high in its own right.

It is also rising. The quarterly trimmed mean rose 1.0% in the September quarter, up from 0.8% in the June quarter. Annualised, that is roughly 4.1%, against about 3.2% for the June quarter. Services inflation rose to 4.1% in the year to September from 3.7% in August, and the RBA's measure of market services inflation (excluding telecommunications and domestic travel) was 4.2% over the year.

The economy is slowing

The other half of the picture points the other way. Employment fell by 39,300 in September, and the unemployment rate rose to 4.7%, from 4.4% a year earlier. The underemployment rate edged up to 6.3%. GDP grew 0.4% in the June quarter, which the RBA describes as below potential growth.

Housing prices were 4.7% below their March 2026 peak in September, after about six months of declines that the RBA attributes mainly to higher interest rates and tax changes in the federal budget. The RBA forecasts GDP growth of 1.6% over 2026 and unemployment rising to 5.1% by the end of 2028.

EconoLens Analysis: a hike backed by the data, with less room left for the next one

Australia's hike looks like Canada's, which came six days earlier: a commodity-exporting economy tightening into an energy shock. On the evidence, the two are different decisions.

In Australia, underlying inflation is above the top of the 2–3% target range on each core measure shown here: the trimmed mean was 3.7% over the year to the September quarter, and on the monthly CPI the trimmed mean was 3.6% and the weighted median 3.4% in the 12 months to September. Inflation excluding volatile items, an exclusion measure, was 3.7%. The quarterly trimmed mean has accelerated. The RBA also judges output to be above potential. The hike responds to inflation that is already measured, not only to the risk that it will spread.

In Canada, core inflation measures were close to 2% when the Bank of Canada raised its rate on 28 October, with CPI-trim at 1.8% in September, and the Bank cited some excess supply. As we set out in our 30 October review, its case rested mainly on survey evidence that firms plan to pass on costs and that near-term expectations have risen. The two trimmed-mean measures are built differently, so the comparison is indicative, but the gap is large: Australia's monthly trimmed mean was 3.6% in the 12 months to September, 1.8 points above Canada's CPI-trim for the same period.

The same holds in real terms. Subtracting the latest underlying inflation from the policy rate gives a simple, backward-looking real rate. Australia's is about 1.15 points after the hike on the quarterly trimmed mean (4.85% minus 3.7%). On the September monthly trimmed mean, the like-for-like comparison with Canada, it is about 1.25 points, against about 0.7 for Canada (2.50% minus 1.8%). Against the RBA's own trimmed mean forecast of 3.5% for June 2027, Australia's real rate is about 1.35 points; against 2.9% for December 2027, about 1.95.

The conclusion survives other measures. On the weighted median the real rate is about 1.45 points, and on inflation excluding volatile items about 1.15. Only against headline inflation does it shrink, to about 0.95 points on the quarterly measure and 0.55 on the monthly one, and that gap is largely fuel. The RBA's forecasts assume oil prices fall back after the December quarter.

The strongest evidence against the hike is the labour market. The RBA raised its estimate of the unemployment rate consistent with low and stable inflation (the NAIRU) to around 4¾%. September's 4.7% is now just below that level, and the September quarter averaged 4.6%. The RBA still judges the labour market to be slightly tight, and the average of its models puts the NAIRU higher, at around 5%, so on today's level of unemployment the labour market is not yet loose.

The case for waiting rests on direction rather than level. The RBA forecasts unemployment at 4.8% in the June quarter of 2027 and 5.1% by the end of 2028, above both estimates, with the economy moving from excess demand to balance next year and spare capacity emerging during 2027.

The RBA's neutral-rate estimates point the same way. In mid-2026, when the cash rate was 4.35%, it was already a little higher than every one of the Bank's model estimates of the rate that neither stimulates nor restrains the economy, and the Bank calls its assumed policy path restrictive. The RBA also points to the usual lags in monetary policy, so part of the 1.25 points of tightening this year has yet to show up in activity.

So the evidence supports the decision on inflation, but it narrows the case for going further. A real rate above 1 point on every underlying measure, a policy rate above the neutral estimates published for mid-2026 and unemployment close to the RBA's own full-employment estimate together suggest the next move depends heavily on whether underlying inflation turns down in the coming quarters.

Where the assessments disagree

The disagreement is inside the RBA. The Board's stated reasoning was that the revised outlook, and the risk that inflation turns out higher still, justified tighter policy now. The three who voted to hold were not identified, and the statement does not give their reasons; the minutes, due on 17 November, should set them out.

The considerations on each side are in the RBA's own documents. For acting: broad-based inflation above target, a quarterly trimmed mean that rose to 1.0%, rising inflation expectations and an inflation outlook revised up. Wages are part of this: the Wage Price Index rose 3.2% over the year to the June quarter, and the RBA expects a pickup in the September quarter, partly because modern award wages were raised by 4.75%.

For waiting: a slowing economy, falling housing prices, rising unemployment, a policy rate already above neutral estimates, and the lags with which earlier increases take effect. The RBA itself cautions that neutral-rate estimates are very uncertain: in one of its models, the 90% probability interval for the current neutral rate spans about 7 percentage points.

Global implications

Two inflation-targeting commodity exporters have now tightened within six days of each other, for different reasons, while the Federal Reserve, the European Central Bank and the Bank of Japan held in late October. The common thread is the energy shock from the Middle East conflict. The RBA's November forecasts assume oil prices in the December quarter 35% higher than it assumed in August.

The second thread is technology. The RBA lists rapid growth in AI-related prices as a factor in global inflation, and notes that South Korean export prices rose about 40% over the year to the September quarter. In Australia, data-centre investment is also supporting activity, and the RBA lists the risk that strong AI-related investment pushes up input costs by more than expected among the upside risks to inflation. Unlike a fuel shock, that pressure comes with stronger demand, so it is harder for central banks to treat as temporary.

What happens next

• 17 November 2026: minutes of the 2–3 November meeting, which should explain the three votes to hold.
• 18 November 2026: ABS Wage Price Index for the September quarter. The RBA expects wages growth to have picked up.
• 19 November 2026: ABS Labour Force for October.
• 25 November 2026: ABS monthly CPI for October.
• 7–8 December 2026: the RBA's next Monetary Policy Board meeting.
• 9 December 2026: the Bank of Canada's next rate decision.

The RBA's forecasts assume the cash rate averages about 4.9% in the June quarter of 2027, an assumption it derives from market pricing. If the October CPI and wage figures show underlying inflation still accelerating, the case for that further step strengthens. If unemployment rises above the RBA's 4¾% estimate while underlying inflation steadies, the minority's case for holding gains ground.

Conclusion

The RBA's November hike is backed by its inflation data in a way that Canada's October hike was not: Australia's underlying inflation is about 1.2 points above the midpoint of its target range and still rising. What makes the decision close is the economy, not the inflation numbers. With the labour market near the RBA's own estimate of full employment and the policy rate above the neutral estimates it published for mid-2026, the evidence supports this increase but leaves the next one dependent on underlying inflation turning down soon.

The data and the working

Cash rate in 2026: 3.60% at the start of the year; increases of 0.25 points on 4 February, 18 March, 6 May, 30 September (effective dates) and on 3 November (decision) give 3.60 + 5 × 0.25 = 4.85%, a cumulative 1.25 points.

Real cash rate, Australia (after the hike): trimmed mean, year to September quarter 4.85 − 3.7 = 1.15; trimmed mean, September monthly 4.85 − 3.6 = 1.25; weighted median 4.85 − 3.4 = 1.45; CPI excluding volatile items 4.85 − 3.7 = 1.15; headline, year to September quarter 4.85 − 3.9 = 0.95; headline, September monthly 4.85 − 4.3 = 0.55. Before the hike, on the quarterly trimmed mean: 4.60 − 3.7 = 0.9.

Against the RBA's trimmed mean forecasts: June 2027, 4.85 − 3.5 = 1.35; December 2027, 4.85 − 2.9 = 1.95.

Canada: 2.50 − 1.8 (CPI-trim, 12 months to September 2026) = 0.7. Trimmed-mean gap, 12 months to September 2026: 3.6 − 1.8 = 1.8 points.

Annualised quarterly trimmed mean: (1.010⁴ − 1) × 100 = 4.06%, shown as roughly 4.1%; (1.008⁴ − 1) × 100 = 3.24%, shown as about 3.2%. This is a simple compounding of one quarter's change, not an official figure.

Gap to target: 3.7 − 2.5 = 1.2 points above the midpoint; 3.7 − 3.0 = 0.7 above the top of the range. Unemployment: 4.7 − 4.4 = 0.3 points higher than in September 2025. Against the NAIRU: 4.75 − 4.7 = 0.05 points below the RBA's assessment and 5.0 − 4.7 = 0.3 below its model average; the RBA's forecast of 4.8% for the June quarter of 2027 is above the first and 5.1% for the end of 2028 is above both.

These are ex-post real rates, using inflation over the past year, except the two rows that use the RBA's forecasts. The Australian and Canadian trimmed means use different methods, so cross-country comparisons are indicative.

Related reading on EconoLens: Canada hikes as the Fed, ECB and Bank of Japan hold, our 23 October preview of the oil-shock rate decisions, Australia's June inflation figures, monetary policy explained and the live crude oil (WTI) indicator.

FAQ

Did the Reserve Bank of Australia raise interest rates in November 2026?

Yes. On 3 November 2026 it raised the cash rate target by 0.25 points to 4.85%, by a 6–3 vote. It was the fifth increase of 2026.

Why did the RBA raise rates?

It said inflation remains elevated and broadly based, that its forecasts have risen partly because of higher fuel and commodity prices linked to the Middle East conflict, and that further tightening was needed to bring inflation back to its 2–3% target range.

What is trimmed mean inflation?

It is a measure of underlying inflation that removes the items with the largest price rises and falls in each period and averages the rest, so that one-off swings such as a fuel shock have less effect. It was 3.7% in Australia over the year to the September quarter of 2026.

When will Australian inflation return to target?

The RBA forecasts trimmed mean inflation of 3.5% in the June quarter of 2027, 2.9% in the December quarter of 2027 and 2.5% around mid-2028. This is a projection with wide uncertainty bands, not a certainty.

When is the RBA's next meeting?

The Monetary Policy Board next meets on 7–8 December 2026. The minutes of the November meeting are due on 17 November.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. EconoLens is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making investment decisions.