RBA to hike cash rate in February in blow to households – realestate.com.au

The Reserve Bank has started 2026 with a bang, raising interest rates for the first time in more than two years in a bid to bring inflation back to target.

At its first meeting of the year, the RBA raised the official cash rate by 25 basis points to 3.85%, a move widely expected by economists and financial markets after stronger-than-expected inflation figures last month and a buoyant labor market.

In its statement after the meeting, the RBA board said recent data confirms that inflationary pressures have increased “materially” in the second half of 2025.

“While some of the increase in inflation is considered to reflect temporary factors, it is clear that private demand is growing faster than expected, capacity pressures are greater than previously thought and labor market conditions are somewhat tight,” the statement said.

“The board assessed that inflation was likely to remain above target for some time and that it was appropriate to increase the target for the cash rate.”

It’s a blow to heavily indebted households, who now face the prospect of higher mortgage payments, just months after markets widely expected interest rates to remain unchanged or even fall through 2026.

REA Group executive manager of economics Angus Moore said the RBA remains focused on inflation, which is now well above the RBA’s target range of 2-3%.

According to the Australian Bureau of Stastics, the consumer price index (CPI) rose 3.8% in the 12 months to December, while moderate average inflation, which softens the impact of volatile, one-off price movements, stands at 3.3%.

“With underlying inflation above both the RBA’s target range and above what it forecast in November, the case for a rate cut to start the year was strong,” Moore said.

“How inflation evolves in early 2026 will determine today’s price development.”

At a press conference after the decision, RBA Governor Michele Bullock said the inflation path will remain higher for longer than previously thought.

“High inflation hurts all Australians,” Bullock said. ‘It is important to note that when assessing the inflation outlook we do not just look at current inflation.

“Based on the data we have seen and conditions here and around the world, the administration now believes it will take longer for inflation to return to target, and this is not an acceptable outcome.”

House prices are still rising

The average home value in Australia rose 0.2% to $883,000 in January, according to the latest PropTrack Home Price Index.

This marks the thirteenth consecutive month of growth and pushed property prices to a new record thanks to the RBA’s three rate cuts in 2025.

While the easing cycle saw cash rates fall from 4.35% in 13 years to 3.6% in just six months, the revival of rate hikes could pull the handbrake on market activity as buyers pause to assess the outlook for interest rates.

Annual house price growth is expected to be between 6 and 8% this year, compared to the 8.8% increase recorded in 2025, according to the realestate.com.au Property Market Outlook.

“Higher rates this year will slow price growth compared to the pace recorded last year,” Moore said.

While buyers typically circle back into the market in February after a slowdown over Christmas and the summer holidays, a higher cash rate could dampen confidence and make for a slower start to the year.

Buyer activity could take a hit after Tuesday’s interest rate decision. Photo: Getty

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“For those looking to buy, the RBA’s decision is a signal to sharpen your strategy,” said Anthony Waldron, CEO of Mortgage Choice.

“If buying your first or next home is part of your 2026 plans, a rate increase will likely have an immediate impact on your borrowing power.”

Knock-on effects are mounted

Reward Homes CEO Ratu Knight told realestate.com.au the borrowing power brought on by the rate hike will add additional risk to the embattled targets of the federal government’s National Housing Agreement.

The national delivery of new homes is lagging across the country and is already more than 60,000 homes behind the target of 1.2 million after the first year.

“The increase risks pushing more people out of new housing options and into older, less suitable established homes,” Knight said.

Housing construction activity is lagging behind the government’s target of 1.2 million homes. Photo: Getty

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“In a rising interest rate environment, risk tolerance declines sharply. Buyers are much less willing to accept cost overruns or delays, which is why certainty has become such a crucial factor in purchasing decisions.”

More walks in prospect?

Whether this increase is a one-off measure or the start of a new tightening cycle remains to be seen in the coming months.

The RBA has relied on a comprehensive, monthly data indicator from the Australian Bureau of Statistics since November. It was introduced in an effort to help the bank make decisions faster and forecast more accurately without having to wait for quarterly data.

Households with a variable interest home loan will see their mortgage interest rates rise. Photo: Getty

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However, Governor Michele Bullock has said the bank needs time to adapt to the data, which could buy borrowers some time in the bank’s decision-making.

January inflation data, wage price data and labor force figures for the first two months of the year will also be published before the RBA board meets again.

“Right now, another rate hike is expected by mid-to-late 2026, but whether that happens will depend on how persistent inflation is,” Moore said.

The next cash rate decision will come on March 17.