The rate rise that stops the economy? Fears of an RBA-induced recession

November 2, 2026 — 7:30pm

The Reserve Bank is being warned it could drive Australia into a recession and leave tens of thousands of people out of work with a Melbourne Cup Day interest rate rise that will lift pressure on Treasurer Jim Chalmers to cut deeper into government spending.

Financial markets and most economists expect the RBA to lift official interest rates on Tuesday afternoon to an 18-year high of 4.85 per cent in a bid to quell inflation that has sat above the bank’s 2-3 per cent target band for most of the past four years.

An increase on Tuesday would be the fifth this year. On a 30-year $600,000 mortgage, monthly repayments will have increased by a cumulative $500 if the Reserve moves on the cash rate.

But there are growing concerns such an aggressive tightening in monetary policy will slow the economy and push people out of work. The bank was already forecasting economic growth to slow to 1.4 per cent by year’s end while unemployment, at 4.7 per cent, is already above what the Reserve had been predicting.

AMP chief economist Shane Oliver, who put the chance of recession at between 30 and 40 per cent, said the current fall in property prices would make households feel less well-off and contribute to a drop in consumer spending.

He expects the RBA to downgrade its outlook for economic growth to as low as 1 per cent by mid-2027, with unemployment likely to be forecast to hit 5 per cent.

“It’s Melbourne Cup Day, so that’s the race that stops the nation. This could be the rate rise that stops the nation,” he said.

“The bank knows at the back of its mind that a recession is now a risk. Every time rates go up, the chance of a recession goes up.”

HSBC Australia chief economist Paul Bloxham said the RBA was lifting rates to slow down consumer spending across the housing sector to ensure other parts of the economy such as data centre construction, defence and public infrastructure could grow without excessive inflation.

But he warned it was a high-risk strategy given the state of economy.

“As we see it, given the need to get inflation down, the risks are rising that Australia’s economy will have a harder landing – or even a recession,” he said.

The Reserve Bank has played a part in past recessions, most infamously in the 1990-91 downturn ahead of which the RBA had pushed official interest rates to 17 per cent. Unemployment reached 11 per cent during that recession.

Chalmers is under growing political pressure to help the Reserve take inflationary pressures out of the economy by using his upcoming mid-year budget update to cut government spending.

Liberal leader Angus Taylor said it was public spending behind the lift in interest rates that, since the government came to power in 2022, had added $30,000 to the cost of a typical mortgage.

“The Melbourne Cup is normally a day where people look for a winner, but there’ll be a lot of losers on Melbourne Cup Day … if interest rates go up again as is expected,” Taylor said.

Environment Minister Murray Watt rejected suggestions that government spending was causing Australia’s inflation woes.

“Even if the Australian government was to cut its budget to zero, we would still be experiencing inflationary pressures because of what’s happening around the world,” he told ABC radio.

NSW Premier Chris Minns urged the RBA to be cautious, warning a rate rise would lead to job losses in his state.

“The impact of another rate rise on the NSW economy will be massive. There’ll be jobs that go that will never come back. There’ll be shops that close that do not reopen with another rate rise,” he said.

ACTU secretary Melissa Donnelly said the bank should not add to the four rate hikes it had inflicted on borrowers this year.

“Supermarket prices went up by 7 per cent for an average basket of items between March and June across all the major supermarkets. That’s well above CPI and I don’t know what the Reserve Bank expects people to do about that: not buy milk and potatoes? They’re hardly luxury items,” Donnelly said.

Central banks around the world have lifted interest rates to deal with higher inflation driven in part by the war against Iran. The RBA had expected Brent crude to be around $US80 a barrel by now. Instead, it has averaged more than $US100 a barrel for the past two months and on Monday was $US110.

There are fears President Donald Trump could re-start strikes on Iran depending on the results of this week’s US midterm elections.

The Reserve has also been surprised by the surge associated with the AI data centre construction boom. A year ago, it had forecast business investment to have grown by 2 per cent through 2026. It is now on track to be up by at least 4.3 per cent.

The RBA’s previous four rate rises appear to be having an impact, with major retailers starting to report a drop in sales.

Furniture retailer Nick Scali recently revealed its sale orders for the first three months of the current financial year were down 15 per cent on the same period last year. Consumer bellwether Bunnings last week also reported a slowdown over recent months.

S&P Global’s measure of the Australian manufacturing sector, released on Monday, revealed a deep fall through October that is likely to continue.

Its economics associate director Jingyi Pan said manufacturers were also being hit by supply constraints and higher costs.

“Subdued market conditions, higher interest rates and elevated prices contributed to the sharpest drop in new orders in almost two years, while shipment delays and port congestions were causes for one of the steepest extensions of delivery times since the post-COVID-19 pandemic period,” she said.

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