The Reserve Bank of Australia increased the cash rate by 25 basis points to 3.85% at its 3 February meeting.
The decision was widely expected by economists and markets, but it reinforces an important point for borrowers. The interest rate cycle does not move in one direction, and the RBA remains firmly focused on managing inflation risks.
For buyers looking to enter the property market, or investors considering their next purchase, the move is a timely reminder that trying to time property decisions around interest rate changes rarely works. Rate movements are only one part of the picture, and waiting for the “perfect” moment can mean missing opportunities driven by supply, demand and affordability at the local level
The RBA’s decision wasn’t made lightly. After inflation peaked in 2022 and gradually declined, the central bank became increasingly concerned about a material pick-up in price pressures during the second half of 2025. The board concluded that inflation is likely to remain above the 2-3% target range “for some time”, prompting action to cool the economy.
Several key metrics shaped this decision:
The latest data shows underlying inflation running hotter than anticipated. According to the Australian Bureau of Statistics (ABS), annual trimmed mean inflation (the RBA’s preferred measure) rose 3.3% in December 2025, up from 3.2% the month prior.
The RBA now forecasts trimmed mean inflation will remain at 3.7% through mid-2026, well above the target range of 2-3%. In fact, the forecasts only see trimmed mean inflation entering the target range until June 2027 and returning close to the 2.5% midpoint by mid-2028. This outlook is central to the cash rate forecast for Australia for the year ahead.
The labour market has proven remarkably resilient. The unemployment rate in December 2025 came in lower than the RBA expected at 4.2%, down from 4.3% in November, according to the ABS. Measures of underemployment also remain relatively low.
Wage growth has eased from its peak, but remains above historical averages at 3.4% annual growth in the September 2025 quarter.
With more Australians in work and earning strong wages, household spending has remained more robust than the RBA anticipated, adding capacity pressure that keeps prices high.
Another reason why Australian interest rates are likely to remain elevated is the strength of private demand. ABS data showed that household spending rose 1.0% in November 2025, following rises of 1.4% in October and 0.4% in September. When consumers continue to spend, it supports business activity and employment, but it can also keep demand for goods and services higher than the economy’s supply capacity, which adds to inflation.
Demand in the housing market has also had an impact. Property prices rose 9.4% in the 12 months to January 2026, according to Cotality, and housing activity has been picking up in many areas. Rising prices can boost household confidence and perceived wealth, which in turn can encourage more spending and borrowing.
If demand stays strong while supply in the economy is constrained, prices can rise faster and inflation can linger above target. Higher interest rates are one of the few tools the RBA has to cool demand, slow borrowing and spending, and bring inflation back under control.
Despite significant global instability ranging from trade tensions between major partners to shifting policy in the USA, the Australian economy has remained largely shielded. In fact, the RBA said it was positively surprised by recent growth and trade with our major trading partners.
However, global shifts can move quickly. Exchange rates, bond yields and global inflation trends can all influence how the RBA sets policy at home.
Major banks broadly agree that February’s move may not be the last. Both the Commonwealth Bank and NAB expect a reasonable chance of another 25-basis-point hike around May, which could take the cash rate to around 4.10%. Their forecasts reflect expectations that inflation will remain above target through much of 2026.
Westpac takes a slightly more cautious view on the pace, but still notes the bar for further hikes is relatively low if inflation data stays firm.
This raises the question: Will interest rates rise again in 2026? While some had anticipated rate cuts earlier this year, the consensus is now that rates need to remain elevated to bring inflation under control.
As the RBA’s forecasts below suggest, restrictive monetary policy is expected to persist well into 2027, with potentially more hikes to come, meaning borrowers should prepare for an extended period of higher mortgage repayments.
For borrowers, understanding how these shifts affect your repayments is crucial, particularly as mortgage rates in Australia continue to respond to RBA policy moves.
In an environment of rising rates, it is tempting for buyers to sit on the sidelines and wait for the “perfect” moment to enter the market. However, this strategy can backfire in several ways.
When rates do eventually fall, buyer confidence typically surges. The buyers who’ve been waiting flood back into the market simultaneously, creating fierce competition for available properties. What you save in interest costs can quickly evaporate in bidding wars.
Australia’s property markets face ongoing supply constraints, particularly in desirable areas. Even with a rate cut, prices are expected to rise around 7.7% over 2026, according to KPMG. If you wait 12 months for a potential rate cut, the property you want might have already increased in price, far outweighing the benefit of a slightly lower interest rate.
When demand rebounds, quality listings can be snapped up faster. Waiting can sometimes mean fewer options rather than better deals.
Rather than trying to time rate movements, focus on what you can control. Purchase when a property meets your needs and you can comfortably service the loan, both at current rates and with a buffer for potential increases. Work with a mortgage broker who can structure your loan to suit your financial needs and long-term goals.
Shore Financial can help you understand how rate changes affect your loan and options, and find a solution that fits your goals. To discuss your scenario, call us on 1300 416 700, email info@shorefinancial.com.au or fill in this online form.
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