RBA poised for another rate hike

The Reserve Bank of Australia is expected to increase the cash rate from 4.35% to 4.6%, a 25-basis-point move that would be the fourth rise in 2026. This adjustment would take the policy rate to its highest level since 2011, underscoring the central bank’s focus on containing persistent inflation pressures.

Financial markets are already pricing in the likelihood of at least one additional cash rate increase early next year. The expectations reflect concerns that inflation has remained above target for more than five years and that further tightening may be required to restore price stability.

An increase in the cash rate to 4.6% is expected to push typical home loan interest rates to around 6.5%. For a new average-sized mortgage of A$731,000 currently paying a rate of 6.2%, this change would add about A$119 to the current A$4,477 in monthly repayments, taking the total increase in repayments since January to nearly A$480.

While the share of borrowers behind on their home loan repayments remains small, it is rising, according to data analysed by a major bank from S&P. The additional repayment burden from higher rates is likely to place further pressure on household budgets, particularly for heavily indebted borrowers.

Evidence is emerging that higher borrowing costs are already weighing on household spending. Bank transaction data show that households have cut back on purchases of education, motor vehicles and household goods in August, signalling a broader pullback in discretionary outlays.

At the same time, home prices across Australia have fallen more than 4% from their peak earlier this year. The combination of declining property values and rising mortgage costs indicates that the housing sector is under increasing strain as monetary policy tightens.

Senior Reserve Bank staff in recent weeks have highlighted the risk that households could be starting to expect high inflation will persist beyond temporary shocks, including disruptions to oil prices linked to conflict in the Middle East. Such a shift in expectations would make inflation more difficult to bring back to target.

With inflation above target for over five years, the central bank faces potential credibility risks if it does not act decisively. The anticipated move to 4.6%, and the prospect of further tightening, signal an effort to reinforce confidence in its commitment to controlling inflation, even as higher rates add to financial pressure on borrowers and the broader economy.