Australia’s most powerful central banker has hinted at more interest rate increases and admitted the nation feels like it’s in recession following the fifth rate hike this year that has taken the cash rate to an 18-year high of 4.85 per cent.

In a split vote, six of the Reserve Bank’s nine monetary policy board members voted to increase the cash rate target by 25 basis points to the highest level since December 2008 while three opted to leave it unchanged at the September meeting’s 15-year high hike level of 4.6 per cent.

Reserve Bank governor Michele Bullock has also signalled interest rates could still rise again in 2027 after the RBA released new forecasts predicting inflation won’t return to the mid-point of its 2-3 per cent target until mid-2028.

“It is going to make people feel like it’s a recession because they feel poorer, their spending can’t grow very quickly because their incomes aren’t growing very quickly and this is a manifestation of a lack of productivity growth and the fact we’ve had this massive supply shock,” she told reporters in Sydney.

Despite the Middle East oil crisis pushing up headline inflation, underlying inflation is also at elevated levels, with Ms Bullock declaring the cost-of-living crisis is mainly caused by goods and services made in Australia.

“Yes, we have a domestic, homegrown inflation problem, that is true and some of those other countries don’t,” she said.

Ms Bullock said another rate hike could not be ruled out, which would take the cash rate above 5 per cent for the first time since the global financial crisis in late 2008.

“We will need to raise interest rates to the extent that we need to to get inflation down; I don’t know how high that is,” she said.

Home borrowers have been hit with a fifth hike this year, with the Reserve Bank raising interest rates to an 18-year high of 4.85 per cent and now warning inflation won’t return to target until the end of 2027.

The Reserve Bank also left open the possibility of another hike next month or in 2027, following the latest decision that will add $122 to monthly repayments on an average new mortgage.

“The board will continue to do what it considers necessary to bring inflation sustainably back to target,” it said.

In more bad news, the RBA’s updated quarterly statement on monetary policy was revised to not have inflation returning to the top of its 2 to 3 per cent target until December 2027, six months later than predicted in its August statement.

This could potentially mean no rate cuts next year, as the major banks are forecasting, with the RBA now forecasting a return to the mid-point of its inflation target being pushed out to June 2028.

“The board is conscious of the period in which inflation has been too high,” the RBA said.

“Given the revised inflation outlook and the continuing upside risks, the board judged that a further tightening in financial conditions is warranted to support the return of inflation to target.”

Headline inflation was forecast to hit 4.5 per cent by December, reviving the levels reached in March during the early weeks of the Iran war, and still be at 3.7 per cent by the middle of next year.

Unemployment is now forecast to climb to 5 per cent by June 2028 - starting with a “five” for the first time since November 2021 during the end of COVID lockdowns in Sydney and Melbourne.

Economic growth was also forecast to slow to 1.6 per cent by the end of 2026, down from 2.1 per cent during the last financial year, before slowing further to 1.3 per cent by late 2027.

Treasurer Jim Chalmers seized on the fact it was a split vote unlike the last hike in September which was a unanimous decision.

“Today’s decision was widely anticipated but not unanimous. This is unsurprising given considerable uncertainty in the outlook and risks in both directions,” he said in a statement.

KPMG chief economist Brendan Rynne said another rate hike in February was now looking likely.

“After two consecutive rate hikes, the RBA is likely to pause now for the Christmas period in the hope by its next meeting in February conditions may improve,” he said.

“If not it may very well consider further hikes to kick off the new year.”

The latest Melbourne Cup Day increase will add $122 to monthly repayments on an average new mortgage of $731,000 as typical variable mortgage rates approached 7 per cent for the first time since December 2008.

Since February, the RBA cash rate has climbed by 125 basis points, up from 3.6 per cent.

When the banks pass on the latest increase, monthly repayments on an average mortgage would have increased by $597 in just nine months, with the year’s five hikes adding up to an extra $7164 in annual repayments.

The latest Reserve Bank decision was in line with futures market pricing, which rated a Melbourne Cup Day increase as an 80 per cent chance.

Market expectations for a hike soared after the Reserve Bank’s deputy governor Andrew Hauser on October 21 warned the outlook for inflation was “materially worse”.

Pricing surged again after consumer price index data for September showed headline inflation growing at an annual pace of 4.3 per cent, which was the worst reading since March during the early weeks of the Iran war.

Underlying inflation was also elevated at 3.6 per cent with both key measures of inflation remaining above the RBA’s 2 to 3 per cent target for the 14th straight month.