Key Highlights

  • Oil has hovered above $110 a barrel, well above the RBA's August assumption of around $81.
  • The cash rate has risen to 4.85%.
  • The Treasurer blames Middle East tensions for the rate rise.
  • He promises more savings in December but no new fuel relief.

Treasurer Jim Chalmers has put a number on the gap behind Tuesday's Interest Rate rise. In August, the Reserve Bank's forecasts assumed oil at around $81 a barrel. Chalmers says prices have since hovered above $110. The RBA raised the cash rate 25 basis points to 4.85%, and Chalmers blamed the Middle East conflict and promised further budget savings in December. Households now face higher Mortgage repayments, and there is no fuel relief yet.

The oil gap in Chalmers' statement

Chalmers' media release on 3 November set out the comparison directly. "The RBA's August forecasts assumed the global oil price to be around $81 a barrel," he said, "but instead they've hovered higher than $110 in recent weeks."

His release does not specify a currency. The RBA's own oil assumptions are for Brent Crude in US dollars. In its November Statement on Monetary Policy, the RBA assumes Brent at about US$109.50 a barrel for the December quarter of 2026, which it says is 35% higher than its August assumption. That implies an August figure of around US$81.

The Statement also shows the RBA expects oil to ease over time. Its assumption falls to about US$95 by mid-2027 and to about US$79 by the end of 2028.

The Middle East conflict and the rate rise

Chalmers said "the war in the Middle East is pushing up Inflation and interest rates around the world". He described Tuesday's decision as "widely anticipated but not unanimous".

The RBA's Monetary Policy Board was split 6–3. Six members voted to lift the cash rate to 4.85% and three preferred to hold it at 4.60%.

The Board's statement said "global oil Supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation", and that higher fuel prices were being passed through to other goods and services.

The RBA did not attribute the decision to oil alone, however. At her press conference, Governor Michele Bullock said "we are not tightening monetary policy because of the direct impact of oil prices on inflation". She pointed to broad-based underlying inflation and to tighter domestic capacity than previously thought.

The Board also noted that investment, including in data centres, has been stronger than expected.

The outlook has moved a long way since August. The Board now expects inflation to stay elevated through much of 2027, and does not expect it to fall to the top of the 2–3% target band until late 2027. That is about three quarters later than it previously forecast. It also expects Unemployment to rise further than it projected in August, reaching about 4.8% by mid-2027.

Explainer: what the oil assumption changes

The RBA does not try to forecast oil prices itself. It uses an assumed path, generally drawn from futures markets, and then works out what that path means for inflation and growth.

A higher oil assumption feeds the forecasts in two ways:

  • Directly, through petrol and diesel prices, which households see in headline CPI quickly.
  • Indirectly, through transport, freight and production costs, which flow into the prices of other goods and services over time.

The November forecasts reflect both effects. The RBA now forecasts headline CPI inflation of 4.5% over the year to December 2026, falling to 3.7% by June 2027 and 2.7% by December 2027. It says higher oil prices "will weigh on real household incomes".

For the budget, higher oil prices are a mixed picture. Fuel excise is indexed to CPI twice a year, so higher inflation pushes up future indexation increases. Higher Commodity prices can also lift some company tax receipts, while slower growth and rising unemployment would weigh on Revenue and add to spending.

Almost $180 billion in savings, and more promised

Chalmers used the release to defend the government's budget record. "We've found almost $180 billion in savings since coming to government," he said, adding that there had been savings in each of the government's eight budget updates so far.

His key commitment was about the next one: "there will be more savings in the mid-year budget update in December."

The tally is the government's own figure. analysis published on 1 November found that while net policy decisions in this year's budget and last year's MYEFO improved the budget over four years, they added about $14 billion to spending across the current and previous financial years.

He also argued that the budget is not the main source of inflation: "Budgets aren't the primary driver of prices in the economy, but responsible economic management plays a helpful role."

The release says cost-of-living relief is being delivered "through the tax system, the health system" and through higher wages. That includes the cut in the lowest Personal Income tax rate from 16% to 15% from 1 July 2026, already law, with a further cut to 14% legislated from 1 July 2027.

What the release does not promise

The release contains no new fuel excise cut or energy rebate. The same analysis reported that energy rebates and fuel excise cuts were no longer part of the government's response.

That means the December update is likely to be about restraint rather than new relief. Chalmers has said publicly that there is "more work to do to make the budget as tight as it can be". Finance Minister Katy Gallagher would not say whether the government would aim for net savings, as distinct from savings offset by new spending.

Mortgage holders are feeling the decision first. according to reports, Macquarie was the first lender to pass on the full rise, from 19 November. Canstar estimates the average owner-occupier variable rate will reach 6.74%.

What to watch

  • MYEFO in December: the size of the new savings, and whether they produce a net saving over the forward estimates or are offset by new spending decisions. No exact date has been published.
  • Oil prices: the RBA's forecasts assume Brent falls back towards US$95 by mid-2027. A sustained price above US$110 would put pressure on that assumption.
  • Fuel excise indexation in February 2027: the next CPI-linked increase will reflect this year's higher inflation.
  • Lender repricing: whether other lenders follow Macquarie in passing on the full rise.
  • The RBA's next decision: Bullock said "I don't know what the next move will be", and economists are divided between another rise and a long pause.