Reserve Bank of Australia Raises Cash Rate to 4.85 Per Cent to Combat Inflation

The Reserve Bank of Australia has raised the official cash rate by 0.25 percentage points to 4.85 per cent in its fifth rate increase this year, taking the policy rate to its highest level since November 2008. The decision reflects ongoing efforts by the central bank to curb persistent inflation across the Australian economy.

The rate increase comes as headline inflation rose to 4.3 per cent in the year to September, up from 4.0 per cent in August. Trimmed mean inflation, the central bank's preferred measure of underlying price growth, reached an annual rate of 3.6 per cent, marking 14 consecutive months above the Reserve Bank of Australia's target range of 2 to 3 per cent.

Impact on Mortgages and Borrowing Capacity

Borrowers on variable-rate home loans face swift increases to their monthly repayments as commercial lenders adjust their interest rates. A 0.25 percentage point rise adds approximately $92 per month to repayments on a $600,000 variable-rate loan with 25 years remaining. Cumulatively, the rate hikes this year totaling 1 percentage point have added roughly $456 per month, or $5,472 annually, for borrowers with a mortgage of that size. Fixed-rate home loans remain unaffected until their terms expire.

Prospective homebuyers also face reduced purchasing power. Estimates from Canstar indicate that borrowing capacity for an individual earning an average full-time salary of $108,650 decreases by over $58,000 following the latest increase. For a couple where both earn average wages, maximum borrowing capacity declines by nearly $117,000.

Effects on Renters, Savings, and Currency

The impact of higher interest rates extends to the rental market and broader economy. Reserve Bank of Australia chief economist Sarah Hunter noted that rental prices are primarily driven by local supply and demand dynamics rather than individual landlord costs. According to Cotality, national rents increased by 0.5 per cent in the September quarter amid tight housing availability, with the national dwelling vacancy rate holding at 2.1 per cent.

Higher official cash rates typically bolster the Australian dollar by attracting foreign investment into domestic yield-bearing assets, which can lower import costs for businesses and benefit overseas travelers. However, analysts note that foreign exchange valuations remain subject to broader global market factors, including international interest rates and commodity prices.