RBA hikes the cash rate in February in blow to households
The Reserve Bank has kicked off 2026 with a bang, raising the cash rate for the first time in more than two years in a bid to bring inflation back to target.
In its first meeting of the year, the RBA raised the official cash rate by 25 basis points to 3.85%, a move that had been widely expected by economists and financial markets following stronger-than-expected inflation data last month and a buoyant jobs market.
In its post-meeting statement, the RBA board said recent data confirmed inflationary pressures has "materially" picked up materially in the second half of 2025.
"While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight," the statement said.
"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's a blow for heavily-indebted households who now face the prospect of higher mortgage repayments, just months after markets had widely expected rates to remain on hold, or even fall, over the course of 2026.
REA Group executive manager of economics Angus Moore said the RBA remains focused on inflation, which is now sitting well above the RBA's 2-3% target range.
According to the Australian Bureau of Stastics, the Consumer Price Index (CPI) rose 3.8% over the 12 months to December, while trimmed mean inflation, which smooths out the impact of volatile, one-off price movements sits at 3.3%.
“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.
“How inflation evolves across the start of 2026 will be the driver for where interest rates go from here.”
In a press conference following the decision, RBA governor Michele Bullock said the path for inflation was tracking higher for longer than previously thought.
"High inflation hurts all Australians," Ms Bullock said. "It's important to note in judging the outlook for inflation that we don't just look at current inflation.
"Based on the data we have seen and the conditions here and world, the board now thinks it will take longer for inflation to return to target and this is not an acceptable outcome."
Home prices still rising
Australia’s median home value rose 0.2% in January to $883,000, according to the latest PropTrack Home Price Index.
This marks the 13th consecutive month of growth and pushed property prices to a new record high off the back of the three rate cuts the RBA delivered in 2025.
While the easing cycle took the cash rate from a 13-year high of 4.35% down to 3.6% in just six months, the resurgence of hikes could pull the handbrake on market activity as buyers pause to assess the outlook for interest rates.
Annual home price growth is expected to be between 6-8% this year according to the realestate.com.au Property Market Outlook, down from the 8.8% increase recorded in 2025.
“Higher rates this year will slow price growth down compared to the pace recorded last year,” Mr Moore said.
While buyers are usually back circling the market in February after a slow down over Christmas and the summer holidays, a higher cash rate could dampen confidence and make for a more sluggish start to the year.
“For those looking to buy, the RBA's decision is a signal to sharpen your strategy,” Mortgage Choice chief executive Anthony Waldron said.
“If buying your first or next home is part of your plans for 2026, a rate hike will likely have an immediate impact on your borrowing power.”
Knock-on effects mount
Reward Homes chief executive Ratu Knight told realestate.com.au squeezed borrowing power off the back of the hike will create additional risk to the federal government’s beleaguered national housing accord targets.
National delivery of new homes is continuing to lag across the country, already more than 60,000 homes behind the 1.2m target after the first year.
“The hike risks pushing more people out of new housing options into older, less suitable established housing,” Mr Knight said.
“In a rising-rate environment, risk tolerance drops sharply. Buyers are far less willing to accept cost overruns or delays, which is why certainty has become such a critical factor in purchasing decisions.”
More hikes ahead?
Whether this hike is a one-off or the start of a new tightening cycle remains to be seen in the coming months.
The RBA has been relying on a comprehensive, monthly data indicator from the Australian Bureau of Statistics since November. It was introduced in a bid to help the bank make quicker decisions and forecast more accurately without having to wait for quarterly data.
Governor Michele Bullock has said the bank will need time to adjust to the data however, which could buy borrowers some time on the bank’s decision making.
January’s inflation data, wage price data, and labour force figures for the first two months of the year are also set to be published before the RBA board meet again.
“At the moment, another hike is expected by mid-to-late 2026, but whether that happens will be dictated by how persistent inflation is,” Mr Moore said.
The next cash rate decision will come on 17 March.
Source: https://www.realestate.com.au/news/rba-hikes-the-cash-rate-in-february-in-blow-to-households/
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