Interest rates hit highest level since 2008

The financial markets had priced in a 90 per cent chance of an interest rate hike and the Reserve Bank of Australia (RBA) didn’t deviate from the script.

The 25 basis point increase takes the official cash rate to an 18-year high of 4.85 per cent.

It’s a tough time for homeowners, borrowers and most households.

If the RBA lifts the cash rate by another 0.25 percentage points in November and lenders pass on the increase in full, Canstar analysis shows a borrower with a $600,000 debt and 25 years remaining at the start of the year could face an additional $92 a month in minimum repayments. That would take the cumulative increase across five hikes since February to $456 a month for a borrower who started with a $600,000 loan.

These budget blows come as households wrestle with CPI inflation of 4.3 per cent that is eroding wages while the values of their homes are plunging at the fastest pace in four decades.

Amid concerns interest rates as a tool are not impacting inflation, the RBA Board was split in its decision, with six in favour of the rate increase and three voting to keep them on hold.

Disconcertingly, the last time the RBA had rates at this level was in the days before the onset of the Global Financial Crisis (GFC). On November 5, 2008, a frantic RBA cut the cash rate by a whopping 75 basis points, moving it from 6.00 per cent down to 5.25 per cent. A month later, they convened again to slash it further to 4.25 per cent.

Pending an AI bubble-inspired global crash, there’s no immediate signs of inflation coming down of its own accord. The conflict in the Middle East rumbles on without any political resolution in sight, driving up the price of fuel and, subsequently, the cost of many goods.

The fifth rate rise of 2026 might not be the last in the current cycle.

Sally Auld, Chief Economist, NAB, expects more borrower pain to come.

“We need to be open to the possibility (of more rate hikes), given the shift in rhetoric from the Reserve Bank, that it is possible we might see more interest rate rises in the next few months.

“We are in for a period of reasonably elevated rates for a while yet.”

Angus Moore, realestate.com.au’s Senior Economist, said that while the economy has slowed, and the labour market has eased a bit in recent months, the RBA is yet to be convinced that inflation will return sustainably to target without further tightening.

“Higher mortgage costs will continue to weigh on household spending and work to slow economic growth, although a reasonably resilient labour market and growing incomes continue to provide an important buffer.”

Property prices will also be impacted by the high rates environment.

“For the housing market, another rate rise will lengthen the downturn already underway,” Mr Moore said.

Home prices nationally have declined for seven straight months, and are down 4.3 per cent from peak.

“Further increases in mortgage rates will reduce borrowing capacities again for prospective buyers, adding to the downward pressure on home prices.

“The downturn, while brisk, remains an orderly adjustment driven by rising rates and affordability pressures, rather than a distressed housing correction.

“Labour market conditions remain resilient by historical standards, mortgage arrears rates remain low, few borrowers are in negative equity, and many households retain substantial repayment buffers.”

RBA spreads the blame

The RBA’s decision to lift the cash rate reflects growing concern that inflation is proving more persistent and widespread than previously anticipated, despite the slowing economy and the impact of earlier rate increases.

In its latest monetary policy decision, the RBA Board said underlying inflation remained broadly based, with recent data confirming that price pressures were not limited to fuel and other commodities. The inflation outlook had also deteriorated, with the Bank noting that “the inflation outlook has also been revised materially higher in the updated staff forecasts”.

The Board pointed to the conflict in the Middle East as a key contributor to the deteriorating outlook, with higher fuel and other commodity prices adding to cost pressures. It also highlighted domestic pressures, noting that “domestic capacity pressures are also judged to have been a little tighter than earlier thought”. AI-related investment was another factor, driving rapid growth in prices for technology-related goods.

Business costs are also continuing to feed into inflation. The RBA Board noted that its liaison with firms indicated widespread cost pressures.

“Many firms are experiencing cost pressures and are either increasing the prices of their goods and services in response or looking to do so,” the RBA Board noted.

With businesses continuing to pass on higher costs, that is adding to the challenge of bringing inflation under control.

The revised forecasts suggest inflation will remain above 3 per cent for the coming year and elevated through much of 2027.

The Bank said inflation was “not expected to reach the top of the 2–3 per cent target range until late 2027”, around three quarters later than previously forecast. It also warned that this presented upside risks to inflation expectations, with some measures assessed to have risen lately.

The decision comes despite mounting evidence that higher interest rates are already weighing on economic activity. The RBA acknowledged that “the economy is slowing, housing prices have fallen significantly and the unemployment rate has risen”, indicating that the effects of tighter monetary policy are becoming increasingly apparent.

The Bank expects further weakness over the coming year, with higher interest rates and falls in housing prices and turnover expected to weigh on household consumption and dwelling investment. It also believes slower economic growth will help ease inflationary pressures, noting that “growth in output slowing further over the coming year [...] is expected to reduce capacity pressures and help return inflation to target”.

The labour market is also expected to soften. While employment is forecast to continue growing, the RBA Board said, “the unemployment rate is projected to rise by more than expected in the August forecasts”. This highlights the difficult balancing act facing policymakers as they seek to bring inflation under control while limiting the impact on employment and economic growth.

There are, however, areas of resilience. The RBA expects overall business investment to grow more strongly in the near term, supported in part by investment in data centres and other AI-related infrastructure. It also noted that growth among Australia’s major trading partners had been stronger than expected, with “the boost from AI-related investment” outweighing the adverse effects of the Middle East conflict so far.

Nevertheless, it highlighted the risk that prolonged disruption to global oil supplies could maintain upward pressure on energy prices, while an extended period of geopolitical uncertainty could weaken economic growth both internationally and in Australia. Weak productivity growth and uncertainty surrounding the housing market downturn were also identified as ongoing concerns.