RBA lifts cash rate to 4.85% in fifth hike this year - realestate.com.au

The Reserve Bank of Australia (RBA) has raised the cash rate to 4.85%, marking the fifth increase this year and reaching a level not seen since the Global Financial Crisis. This decision was made by the bank's monetary policy board during a meeting on Tuesday.

Market analysts and economists had largely anticipated this tightening, especially after recent comments from RBA officials indicated that inflation is likely to worsen before it improves. Following the announcement, RBA Governor Michele Bullock is scheduled to speak to the media at 3:30 PM.

According to the latest figures from the Australian Bureau of Statistics, headline inflation rose to 4.3% in the year ending September, the highest rate since March. The housing sector has significantly contributed to this inflation, with costs associated with new dwelling purchases, rents, and utilities increasing by 5.2% in September alone.

Underlying inflation, which excludes the most volatile items like fuel, was reported at 3.6% for the same period, indicating no improvement over six consecutive months. In a statement released with the cash rate decision, the RBA board noted a substantial upward revision in the inflation outlook compared to previous forecasts.

The board stated, "Inflation is now expected to remain elevated well into 2027 and is not projected to reach the target range of 2–3% until late 2027, approximately three quarters later than initially forecast." The RBA also highlighted that the four rate hikes implemented this year have already tightened financial conditions across the economy.

The statement further pointed out that the economy is slowing, with housing prices experiencing significant declines and the unemployment rate on the rise. "Higher interest rates, along with falling housing prices and turnover, are likely to dampen growth in dwelling investment and household consumption," it read.

The decision to increase the cash rate was made with a majority vote; six members supported the hike to 4.85%, while three opted to keep the rate unchanged. Despite hopes for a cooling effect following earlier rate increases in February, March, May, and September, it remains uncertain when the peak of this inflationary cycle will occur.

Angus Moore, the executive manager of economics at realestate.com.au, commented, "The economy has slowed, and the labor market has eased a bit in recent months, but the RBA is yet to be convinced that inflation will return sustainably to target without further tightening." He added that another rate rise would likely prolong the current downturn in the housing market.

This latest increase in the cash rate will add to the financial strain on households as the holiday season approaches, with lenders expected to pass on the additional costs to borrowers. Mortgage Choice CEO Anthony Waldron advised homeowners to consult with mortgage brokers to ensure their home loans remain competitive.

For those with variable-rate loans, the impact of increased repayments will likely be felt starting mid-December, potentially rising by up to $154 per month in the most expensive regions of the country. Data from realestate.com.au illustrates the additional costs that borrowers in various capital cities will face starting next month.

Home values have been declining across Australia, with realestate.com.au reporting a 4.3% drop since March and a continued decrease for seven consecutive months through October. In Sydney, where approximately 20% of Australians reside, the median home price has fallen by $50,267 since the beginning of the year.

While rising rates and affordability issues are causing concerns within the property market, Moore notes that the downturn may not be as severe as it appears. He pointed out that labor market conditions remain relatively strong compared to historical standards, mortgage arrears are low, and most borrowers are not in negative equity. Many households also maintain significant repayment buffers.

Looking ahead, uncertainty surrounds whether rates will increase again next month. The big four banks had anticipated just one more hike for 2026 before this week. Factors such as ongoing geopolitical tensions and consumer spending during Black Friday and the Christmas season will likely keep the RBA vigilant in its monitoring of inflationary pressures.

The RBA has expressed concerns over Australia's low productivity as a significant issue amidst its ongoing struggle with high domestic inflation, but it has refrained from suggesting that a recession is imminent. Current forecasts from the Commonwealth Bank project economic growth to drop to 1% annually by mid-2027, down from a previous estimate of 1.8%. The RBA's final decision on the cash rate for the year is scheduled for December 8.