Australia braces for interest rate hike as government reports smaller budget deficit

Australian households face a tough week ahead, with rising unemployment, persistent inflation and a likely interest rate increase all adding pressure, even as the governing Labor party insists conditions will eventually improve.

Mortgage holders are preparing for the Reserve Bank of Australia to raise its official cash rate to 4.6% on Tuesday — the highest level in almost 15 years. Financial markets are treating the move as nearly certain.

Since the RBA's board last met in August, central banks in the United States, Japan and Europe have all raised their own rates, attributing the decisions to rising oil and fuel costs driven by the worsening war between the US and Iran.

Deputy Prime Minister Richard Marles acknowledged on Sunday that households are "doing it tough" and said the government is working to ease inflationary pressure. Average petrol prices across Australia's five largest cities reached $2.37 per litre, with diesel at $2.69, as of Wednesday. The government has ruled out reinstating a previous cut to fuel taxes to help drivers cope with the cost.

Inflation ran hotter than expected in August, and figures due from the Australian Bureau of Statistics on Wednesday could show the rate climbing from 3.5% to 4%.

Budget outcome

On Monday, Treasurer Jim Chalmers and Finance Minister Katy Gallagher will present the final budget outcome for the 2025-26 financial year. Despite the economic headwinds, Chalmers is expected to announce that the budget deficit came in smaller than originally forecast, describing the improvement as worth billions of dollars to the government's books.