Well, it's happened. Again. The Reserve Bank of Australia (RBA) has just announced that interest rates will rise once more today.
In a six-three majority decision, the RBA board decided to raise the cash rate to 4.85%, an increase of 25 basis points. It is the fifth time that the RBA has increased interest rates in 2026, with this rise joining the hikes we saw in February, March, May, and September. By taking the cash rate to 4.85%, Australian interest rates are now at an 18-year high. You'd have to go back to the period just before the global financial crisis hit in late 2008 to find the last time the cash rate was in this territory.
Of course, this decision was not exactly unexpected. As my Fool colleague James reported just this morning, "unfortunately for borrowers, based on the latest RBA Rate Tracker, the market believes there is an 80% probability of a 0.25% increase to 4.85% today". It turns out those odds were bang on the money.
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ASX shares wobble as RBA raises interest rates
As such, it will probably come as no surprise to see the Australian share markets giving a rather lacklustre performance this Tuesday. Despite starting strong this morning with a near-0.5% rise, the S&P/ASX 200 Index (ASX: XJO) is currently up just 0.18%. That's after the index briefly dipped into negative territory when the RBA's decision became public this afternoon.
There wasn't a lot of good news for investors, or for Australians in general, in the statement that the RBA released with this decision to hike. Here's some of it:
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.85 per cent.
Inflation remains elevated and recent data indicate that it is broadly based. The inflation outlook has also been revised materially higher in the updated staff forecasts. This partly reflects higher fuel and other commodity prices affected by the conflict in the Middle East. But domestic capacity pressures are also judged to have been a little tighter than earlier thought. AI-related investment is driving rapid growth in prices for technology-related goods, and inflation in many goods and services remains high… Inflation is now forecast to remain elevated through much of 2027 and is not expected to reach the top of the 2–3 per cent target range until late 2027, around three quarters later than previously forecast…
The increases in the cash rate target since the beginning of the year have tightened financial conditions. The economy is slowing, housing prices have fallen significantly and the unemployment rate has risen. The forecasts see growth in output slowing further over the coming year, which is expected to reduce capacity pressures and help return inflation to target.
A silver lining from this hike
So the economy, particularly inflation, is clearly not where the RBA wants it to be. Not even close, judging by the tone of its statement. It doesn't sound like it is ready to draw a line under this steep hiking cycle either. The board finished off its statement by stating, "The Board will continue to do what it considers necessary to bring inflation sustainably back to target".
Shares traditionally come under pressure from higher interest rates. Investors should certainly keep this in mind. However, there's a silver lining in every cloud. Today's decision will mean that savings accounts, term deposits and other cash-based investments will become even more lucrative. It is now possible to get a term deposit with an interest rate above 5.5% today. And that could climb even higher in the days and weeks ahead. Given that these investments (unlike ASX shares) offer zero risk of capital loss, investors now have many sources of risk-free yield to consider.
