Abrupt RBA turnaround as interest rates lifted just months after last cut

Central banks don’t like to perform monetary policy U-turns, but the Reserve Bank of Australia (RBA) has screeched on the brakes and changed direction on interest rates.

The RBA on Tuesday (3 February) hiked interest rates by 0.25 per cent, to an official cash rate of 3.85 per cent.

With inflation having risen at an expectedly fast pace to 3.8 per cent, the RBA felt it was forced to act by lifting rates and trying to put a handbrake on consumer spending.

If - as is usual for the banks - the full increase is passed on, it will mean reduced borrowing power for prospective buyers and higher repayments for mortgagees.

The average time between a final cyclical rate cut and a first rate hike is 10 months. This rate hike comes less than six months after the RBA last cut rates.

That interest rate cut was on 12 August and followed previous cuts in February and May 2025. The bank had since held the cash rate steady at 3.6 per cent.

The rapid change in monetary policy direction comes as inflation takes off outside the RBA’s preferred 2 to 3 per cent target range and property prices soar on the back of lower repayments.

The national median house price in 2025 shot up 8.6 per cent, more than double the pace of wage increases, led by a 14.5 per cent rise in Brisbane’s median price and 15.9 per cent in Perth.

RBA admits rate hikes might not work

The rate hike was almost unimaginable at the midway point of last year but when inflation took off, everything changed. Before Tuesday’s decision, financial markets had priced in about a 66 per cent chance of a 0.25 per cent hike.

In making its move, the RBA Board made it clear they didn’t see inflation going away on its own.

“The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target,” it noted in its Monetary Policy Decision statement.

The Federal Treasurer, Jim Chalmers, had this week fended off accusations that government spending was to blame for higher inflation. He found some support from the RBA, which put more of the blame on private spending.

“Growth in private demand has strengthened substantially more than expected, driven by both household spending and investment.

“Activity and prices in the housing market are also continuing to pick up.”

With governments of any persuasion reluctant to apply policies that might cause higher unemployment, lower spending or higher taxes – and voter backlash – it’s borrowers who are left to carry the can for the greater economic good.

The RBA acknowledged as much.

“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive,” the RBA noted.

“On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures.

“Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside.”

Housing supply is core issue

REIA President Jacob Caine was among the commentators who doubt interest rate increase will have their desired effect, while hitting stretched borrowers hard.

He said average loan repayments already accounted for 47.0 per cent of median family income.

“This rate increase … will place renewed pressure on buyers and mortgage holders.”

Mr Caine said while the RBA is using monetary policy to manage inflation, housing cost pressures are fundamentally a supply issue.

“Housing inflation remains persistent because Australia does not have enough homes,” he said.

“Chronic supply shortages drive higher prices, higher inflation and, ultimately, higher interest rates, and (therefore) worsening affordability.”

“Addressing planning bottlenecks, accelerating new supply and supporting social and affordable housing must remain the priority if we are serious about easing long-term housing and inflation pressures.”

Interest rates and property prices

Higher interest rates have a dampening influence on property prices but whether this first hike in what might become a series of rises can slow an overly buoyant property market is yet to be seen.

The impacts of the three previous cuts are still flowing into the market, as households with a mortgage look to capitalise on their improved position and purchasing decisions are gradually considered and made.

Oliver Hume Property Group Chief Economist, Matt Bell, said there would be a negative impact on property markets but it was likely to be muted.

“Initially, there will be the impact of the rate hike on sentiment and the ability to borrow, and we are already seeing some of this in the most interest-rate sensitive markets of Sydney and Melbourne, with the slowing of established house price growth in December and January,” he said.

“We have to remember that the reason we’re now getting rate hikes rather than cuts is because the economy is running hotter than expected; household spending is stronger, unemployment is lower and growth and inflation are higher.

“Having one of the three rate cuts last year reversed is undoubtedly, on balance, negative for the property market outlook for 2026, but rates remain 0.5 per cent lower than they were at the same time last year, population growth looks to be picking up again, the amount of available stock, whether it be in established or new land markets remains low, and we aren’t building enough new housing.

“Price growth in Brisbane, Perth and Adelaide remains hot, which should help Melbourne take some advantage of its strong affordability levels.

“This cut is unlikely to derail recoveries where they have begun (like Melbourne established and land markets) or have more impact than the three cuts that have come before it in those hot markets.

“2026 is still likely to be a year of growth for new and established property markets.”

The next interest rate move

Cotality’s Head of Research, Gerard Burg, said the outlook for the cash rate remains somewhat clouded.

“Pricing in the interbank cash futures market in late January implied at least two rate increases across 2026.

“Among market economists, three of the big four banks currently see this hike as a ‘one and done’ move, with the RBA remaining on hold for the remainder of the year, while NAB see a second increase mid-year.

“Given the underlying supply and demand pressures in the Australian housing sector, it is unlikely that a single rate hike will substantially alter the property market balance.”

Property in the lower price ranges might be the ones to feel the heat this year, he added.

“The hike will reduce the borrowing capacity of buyers, with a median income household in Australia losing around $18,000 from their mortgage limit.

“This could push an increasing number of buyers from mid-tier properties to lower quartile ones, leading to higher demand on the urban fringes and regional markets close to capital cities.”