Interest rates in Australia may not yet be high enough to slow inflation, minutes of the RBA’s latest interest rate decision show, raising the prospect of prolonged mortgage pressure for mortgage holders.
The minutes of the Reserve Bank of Australia’s (RBA) February meeting, released on Tuesday, have provided new insights into the first rate hike in two years.
The board voted unanimously at its first meeting of 2026 to increase the cash rate by 25 basis points to 3.85%, following a stronger-than-expected rise in inflation in recent months.
But new guidance from the central bank suggests more rate hikes are in the offing, with updated economic forecasts based on the technical assumption that cash rates could rise by around 60 basis points to 4.45% by mid-2028.
This technical assumption is a ‘what-if’ figure that the RBA uses in its forecasts. It is a starting point based on market expectations to see how inflation and growth might react in a given scenario.
While not a forecast, this latest look at the bank’s thinking reveals that there is still a lot of uncertainty surrounding the forecasts.
The board acknowledged that expectations are “very different” from November assumptions, when it made only a technical assumption of a 30 basis point rate cut due to “a wide range of data received since the previous meeting that was stronger than expected.”
“Members noted that inflation had increased in the second half of 2025 and was currently too high,” the minutes said.
“While the increase in underlying inflation was contrary to the central projection six months earlier, it represented the crystallization of what had been a growing risk highlighted by the board, most recently at the December meeting.”
The RBA said that while some of the rise in inflation was due to transitory factors that would “fade over time”, other price pressures were “likely to persist” with current policy settings.
The minutes also confirm concerns about high levels of borrowing and spending, and that the effects of the strong housing market on inflation are behind the higher technical assumptions.
The risks to the Board’s two objectives of price stability and full employment were identified in the minutes, along with the Board’s confirmation that tightening will be necessary to bring inflation back within the targeted range of 2-3%.
If spending falls, companies can keep up with demand, or if recent price spikes prove temporary, there is still a chance that inflation will fall faster than expected, the report said.
“However, if demand growth continues to pick up, supply is tighter than expected, longer-term inflation expectations start to rise or policies are not restrictive, then inflation could prove more persistent,” the minutes said.
Higher rates for borrowers
For borrowers, this means the cycle of falling interest rates will be over by 2025, with consensus growing among economists that the RBA will have to rise again in May.
That would likely lead to interest rates rising as lenders implement further rate hikes, limiting the room for those with variable mortgages to ease repayments.
The board did note that there are signs the policy could be “somewhat restrictive,” meaning cash rates are high enough to slow borrowing and spending.
Households are spending an increasing share of their income on repayments compared to historical averages, the report said. This means the bank expects people to be able to cut back on other expenses and slow down the economy.
Housing market prospects
Slightly softer house price growth is also expected for the coming year, as interest rates remain high.
The latest realestate.com.au Property Market Outlook predicts house price growth of between 6-8% by 2026, which could add around $62,000 to the cost of an average-priced home, currently $880,000.
For those looking to jump on the property ladder, this slower pace of house price growth could open the door this year.
Government incentives, including the 5% down payment arrangement And Help with buying are also expected to increase market access among first-home buyers.
Inflation and labor market trajectory
The minutes show that the bank’s inflation forecast has been revised significantly higher than in its November monetary policy statement.
The central projection for moderate average inflation now peaked at 3.7% in mid-2026, while headline inflation stood at 4.2%.
Michele Bullock, Governor of the Reserve Bank. Photo: Martin Ollman
Both underlying and headline inflation are expected to fall to just below 3% by mid-2027, with the cooling of headline inflation corresponding to the end of electricity rebates.
“In addition, inflation was forecast to fall to slightly above the mid-point of the target range by mid-2028, assuming cash rates follow the market path,” the RBA said.
While unemployment rose at the end of last year, the bank expects the tightness in the labor market to persist.
This assumption, which means there are more jobs available than workers can fill them, puts additional pressure on inflation.
The expectation is that the labor market will remain tight. Photo: Getty
The unemployment rate is forecast to rise from around 4.25% to around 4.5% by mid-2028. This small increase would give the RBA some leeway to raise rates without causing an immediate big jump in unemployment.
The next clues from employment data will come later this week, with the Australian Bureau of Statistics expected to release new figures on Thursday.
Where interests will end up over the next 2.5 years will depend on how inflation, spending and employment will develop over the course of the year. What is clear, however, is that the risk of long-term high mortgage interest rates is here to stay.
This article first appeared on Mortgage Choice and is republished with permission.
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