Australian mortgage holders are set to pay more on their home loans after the Reserve Bank lifted interest rates on Tuesday, dealing another blow to already stretched household budgets.
The central bank raised the cash rate by 25 basis points to 3.85 per cent – the first increase since November 2023.
According to Canstar’s calculations, an owner-occupier with a $600,000 mortgage and 25 years remaining would see their minimum monthly repayments rise by $90, assuming banks pass it on to their variable customers.
Those with a $1 million loan would be paying $150 more a month on their mortgages.
The rate rise was widely tipped by economists and priced in by financial markets after inflation rose 3.8 per cent in the year to December, up from 3.4 per cent in November.
The RBA has been trying to bring Australia’s stubborn inflation rate back within its 2–3 per cent target range and says it is not expected to return to that band until mid-2028.
‘The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target,’ the Reserve Bank’s Monetary Policy Board said.
Treasurer Jim Chalmers said the decision would be tough for many households.
Reserve Bank governor Michele Bullock (pictured) has struggled to keep inflation within the board’s target range
REA Group senior economist Angus Moore (pictured) said the Reserve Bank’s decision had been widely anticipated.
‘Now, this will be difficult news for millions of Australians with a mortgage and we understand the pressure that this puts on Australian families and businesses. Now, while today’s decision was widely expected, obviously that doesn’t make it any easier,’ he said.
Dr Chalmers rejected claims from the opposition and some economists who argued that government spending had helped drive inflation higher.
‘The statement released by the independent Reserve Bank explaining the decision that they’ve taken today does not mention government spending at all. In fact, it makes it very clear that pressure on inflation is coming from private demand,’ he said.
‘Growth in private demand has strengthened substantially, more This is the point that the Reserve Bank has made today. Pressure on inflation, the big contribution to the growth in our economy, is from private demand and not public demand.’
Analysts at NAB, Citi, RBC Capital Markets, UBS and Barrenjoey Markets have also forecast a second increase this year.
Daily Mail Australia political editor Peter Van Onselen said there may well be further rate rises to come if Labor doesn’t reduce spending.
‘The PM and Treasurer spent far too long acting as if inflation had been defeated and brought under control. They were wrong, plain and simple. Now they need to own their failure to cut spending and do so sooner rather than later.’
REA Group senior economist Angus Moore said the Reserve Bank’s decision had been widely anticipated.
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Despite rate hikes Australian home prices are still expected to rise throughout the year
‘The RBA remains focused on inflation, and with underlying inflation above both the RBA’s target band and what it had forecast back in November, the argument for a rate cut to start the year was strong.’
Mr Moore said the hike would take some momentum out of the housing market.
‘The unemployment rate remains very low, population growth is solid, and new housing supply remains relatively constrained,’ he said.
‘However, higher interest rates this year are likely to slow the pace of price growth compared with last year.’
Mr Moore said how inflation evolves early in 2026 will be the driver for where interest rates go from here.
‘At the moment, another hike is expected by mid-to-late 2026, but whether that happens will be dictated by how persistent inflation is,’ he said.
Compare the Market’s Economic Director David Koch said the rate rise was a necessary evil in the fight against inflation, but warned that households could be paying thousands more every year as a result of the hike to interest rates.
‘Last week’s December quarter CPI result was a shocker. And it’s not just that headline figure – it’s the pace at which inflation is accelerating that really has them spooked,’ he said.
Compare the Market’s David Koch (pictured) ‘said the RBA is ‘walking a tight rope’ right now
‘It was only a couple of months ago that some of the punters were talking about interest rate cuts this year. They’re certainly off the table.
‘Inflation has been running too hot for too long and it’s really important we get ahead.
‘The RBA is walking a tightrope right now. They’ve got to factor in the uncertainty we’re seeing overseas and how the Aussie dollar is faring before moving too quickly.’
‘It’s another whack for the millions of Aussies who have a mortgage but unfortunately it seems like the medicine we need to take to stop inflation accelerating, or at least that’s the judgement from the RBA,’ Mr Koch said.
‘If banks pass it on, as I expect they will, this will have a direct and immediate impact on household budgets, particularly for borrowers with larger mortgages or those who have only been paying the minimum repayments.
Any increase in interest rates would have a direct and immediate impact on household budgets, particularly for borrowers with larger mortgages.
It comes as new data shows just over 25 per cent of Aussies surveyed in January listed mortgage or rental costs as their biggest budget pressure over the past 12 months.
