Five hikes in, and the board is split
On Melbourne Cup Day the RBA lifted the cash rate 25 basis points to 4.85%, the highest since late 2008 and the fifth rise of 2026 (February, March, May, September, November). That is 1.25 percentage points of tightening in ten months.
Two details matter more than the headline. The vote was 6–3, with three members wanting to hold. And the statement quietly dropped September's line about raising rates further if needed.
So is there a next rise? Markets now lean towards a pause at the 8 December meeting. But the more useful question for business owners and investors is a different one: when so much of today's inflation is imported, is raising the cash rate even the right tool?
Two inflations, one interest rate
Headline CPI hit 4.3% in the year to September, up from 4.0% in August. Underlying (trimmed mean) inflation was 3.6%. The gap between those two numbers is largely the imported story.
The imported part. The Middle East conflict pushed Brent crude above US$100 a barrel in March. Petrol prices rose 36% at their peak. Automotive fuel jumped 9.4% in September alone, and transport inflation is running at 8.7%. None of this was caused by Australian demand, and none of it is set in Martin Place.
The domestic part. Housing rose 5.2% over the year, with new dwellings up 4.7% as builders passed on materials and labour costs. Electricity, insurance and services remain sticky. The RBA also says capacity pressures are a little tighter than it thought, and that AI-related investment is pushing up prices for technology goods.
Where they meet. Fuel is now leaking into everything else, freight surcharges, groceries, construction materials like PVC, travel. The RBA's November statement says fuel costs are being passed through to other goods and services, and that it is not expecting inflation back at 3% until late 2027, about three quarters later than it forecast in August.
Do rate rises work? Yes, but not on oil
A higher cash rate cannot make a barrel of crude cheaper. The RBA says so itself: in a May speech, Assistant Governor Sarah Hunter explained that the bank does not target one-off relative price changes like oil. Its job is to stop them spreading into broad, lasting inflation.
That is the real logic behind this cycle. Rate rises work through three channels:
- Demand. Higher repayments cut household spending, which eases pressure on rents, services and construction. That is the domestic half of the problem, and it is responding: the economy is slowing, house prices have fallen and unemployment has risen.
- Expectations. If businesses and workers expect 4–5% inflation, they price and bargain for it. RBA research shows household expectations are especially sensitive to petrol prices, and the bank says some measures have already risen.
- The dollar. Higher rates tend to support the Australian dollar, which makes imports cheaper. This is the one channel that touches imported inflation directly, and it is weak: the AUD actually slipped below 70 US cents after the split vote.
Research found firms pass on cost shocks faster and more fully when the economy is already running hot. Australia entered 2026 with inflation above target and tight capacity, so an oil shock that might have been 'looked through' in 2019 is harder to ignore now.
The cost is real, though. Hiking into a supply shock squeezes households twice, once at the bowser and again on the mortgage, while doing little about the bowser. It is easy to see why three board members voted to hold.
Are rate rises still the right tool?
Rates remain relevant, but they are becoming a blunter instrument in a world of repeated supply shocks. Three shifts are worth watching.
Supply shocks are the new normal. A pandemic, a war in Ukraine, and now a Middle East conflict in six years. Energy, shipping and geopolitics will keep throwing up price spikes a central bank cannot control. Each time, the RBA faces the same choice: tolerate a temporary spike, or tighten to protect expectations.
Inflation is being driven by investment, not just spending. The RBA notes that data-centre and AI-related investment is lifting business investment and technology prices, while higher rates mainly weigh on households and housing. The sector paying the cost is not always the one creating the pressure.
The real fix sits outside the RBA. Weak productivity, slow housing supply, energy security and fuel reserves are what make Australia so exposed to imported shocks. These are fiscal and structural levers. Monetary policy can buy time; it cannot build homes or refineries.
The honest conclusion: interest rates still work on the domestic half of inflation and on expectations, and the RBA would be unwise to abandon them. But expecting the cash rate alone to deliver 2–3% inflation in an economy this exposed to global energy prices is asking it to do a job it was never designed for.
So, are we killing the economy?
No, but the pain is real and it lands unevenly. Even the RBA board couldn't agree, splitting 6–3.
The case that rates are doing too much damage. Growth is slowing, house prices have fallen and unemployment is rising. CBA expects it to push past 5%. And much of today's inflation comes from oil, which no cash rate can fix. Households are paying twice for a problem made overseas.
The case that rates are necessary. Inflation is 4.3% and, in the RBA's words, broadly based, not just fuel. The bigger danger is expectations. The RBA's own history lesson is the early 1990s, once inflation expectations rise, bringing them back down can take a far deeper slowdown. On this view, a slowdown now is the price of avoiding a recession later.
Some perspective. A 4.85% cash rate is the highest in 18 years, but it is below pre-GFC levels and nowhere near the 17%-plus of 1989–90. The economy is slowing, not collapsing. The sharper question is who carries the cost. Recent buyers with large mortgages feel it most; savers and outright owners are largely fine, and some are better off.
The risk is less that rate rises break the country, and more that they keep asking the same group, younger and heavily geared households, to absorb a shock they didn't cause.
Whether or not December brings a sixth hike, we should be planning for rates staying higher for longer. CBA, for one, does not expect cuts until August 2027. A few practical steps:
- Borrowers: stress-test repayments at today's rate plus 0.5%. Lenders are passing on this rise from mid-November.
- Business owners: review contracts with fuel or freight exposure, and check whether your pricing reflects costs you have absorbed this year. Cash-flow buffers matter more when demand is slowing.
- Investors: a slowing economy with sticky inflation rewards quality balance sheets and pricing power. Cash and term deposits are earning their best rates in years.
- Everyone: separate what you can control (debt structure, costs, pricing) from what you cannot (oil, conflict, the RBA's next move).
At Olvera Advisors we help clients make decisions that hold up across scenarios, not just the one in the headlines. If the past ten months have changed your numbers, let's talk.
This article is general information only and does not take into account your personal objectives, financial situation or needs. Consider seeking personal advice before acting.
Sources:
- RBA Monetary Policy Decision, 3 November 2026
- ABS: CPI rose 4.3% in the year to September 2026
- RBA speech, Sarah Hunter: Inflation and the Impact of the Middle East Conflict (19 May 2026)
- ABC News: RBA lifts rates to highest level in 18 years
- ABC News live coverage incl. CBA forecast
- EBC: split vote and AUD/USD reaction
