The four-time runner-up reached his fifth final at Melbourne Park after overcoming the gallant Canadian 4-6, 7-5, 6-7 (4/7), 6-4, 6-2 in four hours, three minutes on Rod Laver Arena.
Djokovic has already beaten Murray in three Australian Open finals and the world number one will get the advantage of an extra day's rest after he knocked out Roger Federer in four sets in Thursday's semi-final.
It will be Murray's ninth Grand Slam final as the Briton, up against the dominant Serb once again, chases an elusive third major title after winning the US Open in 2012 and Wimbledon in 2013.
"I started to get a better read on his serves as the match went on as I was making a few more returns, that was the key."
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It will also be the first time two brothers have played the singles and doubles finals at the same Grand Slam after Jamie Murray reached the men's doubles final with his Brazilian partner Bruno Soares.
Andy Murray's win over Raonic was the 28-year-old Scot's fourth win in seven encounters with the much-improved Canadian, who slowed in the final set and completed the match grimacing from a right groin injury.
"I'm just trying to use what he's giving me on the court and try to make adjustments to my game if needs be.
"Obviously if the injury affected him significantly at the end, then that's tough, especially at this stage of an event.