Last updated: February 16th, 2026
The Australian interest rate saga continues, with 2026 starting with a rate hike from the Reserve Bank of Australia (RBA). Why did the cash rate rise to 3.85%?
Well, inflation is no longer under control. And the RBA can’t make capacity issues magically disappear.
But it isn’t all doom and gloom.
The central bank has acted quickly to dampen demand. And the smart money is forecasting just one additional 0.25% cut in 2026. Or potentially no further cuts. We’ll see.
What’s the case for a brief hiking cycle, and how long before the RBA’s sights are set on easing again?
My forecast below will help you predict the RBA’s next move.
| Key Takeaways: |
|---|
| RBA believes a recent uptick in the CPI will be temporary, but is concerned that inflationary pressures remain. |
| Economists are divided. Some say it’s a ‘one-and-done’ hike. Others expect at least one additional raise in 2026. |
| Financial markets are pricing in at least one further rate hike before the end of 2026. |
| Persistent inflation and factors including labour market tightness, spending recovery, slow GDP growth and global volatility also pose upside risks. |
Are Interest Rates About To Bite Again In 2026?
After more than four years of hikes and holds, the RBA finally cut interest rates at its meeting in February, 2025.
It cut by 0.25% twice more in May and August.
Rising inflation, revealed in the Consumer Price Index (CPI) data released in October and November of last year, kept rates on hold.
An even higher CPI print in January meant a rate hike at the RBA’s first meeting of this year became almost inevitable.
Important!
A return to hiking feels ominous for those paying a mortgage or looking to buy a home. But it was an obviously-needed correction in the minds of many economists.
Paul Bloxham, HSBC’s chief economist for Australia, thinks the upside surprise to inflation shows the RBA went “a little too far” in the interest rate easing delivered in 2025.
HSBC is forecasting one further 0.25% interest rate increase in 2026 to bring the terminal cash rate to 4.10%.
A combination of weaker supply and increased demand impacted inflation and forced the RBA’s hand, according to Bloxham. He argued:
- Australia’s sustainable economic growth rate is lower than the RBA had assumed, due to its productivity challenges, meaning supply is more constrained.
- Federal Government public spending has exceeded expectations, as revealed by the Mid-Year Economic and Fiscal Outlook (MYEFO) in December.
Bloxham said one more hike should “be enough” to get inflation heading back towards the RBA’s 2%-3% target range.
He said the sharp turnaround in rate expectations would help take the heat out of the housing market and cool consumer spending.
Bloxham also argued that two increases this year would put the cash rate “close to neutral.”
AMP deputy chief economist Diana Mousina said she “doesn’t believe” the RBA’s inflation forecasts.
She argues its estimates are too high, based on other domestic and global data, such as:
- Improving data from business surveys and PMIs.
- Flat-ish growth in employment vacancies and job ads.
- Slowing wages growth and easing global inflation.
Lucy Ellis from Westpac said the bank expects one additional rate rise in May, unless near-term CPI prints “surprise noticeably to the downside”.
CommBank is predicting two hikes in total in 2026.
The current cycle will top out at 4.10% according to its head of Australian Economics, Belinda Allen, due to the labour market being in a better position and “an increased resolve from the RBA.”
She admits it’s a close call.
But Allen thinks the RBA’s May meeting would be too soon to see enough evidence that February’s hike was working – making a second cash rate rise likely.
Important!
The central bank’s own estimates for interest rates assumes at least two hikes in the next 12 months, which is based on financial market pricing.
RBA Governor Michele Bullock was typically cagey when discussing the potential for further hikes at the press conference following the 3rd February board meeting:
She wouldn’t be drawn on whether we’re currently in a tightening cycle, referring to the recent rise as an “adjustment.”
Economist and RMIT lecturer, Dr. Sveta Angelopoulos, predicted the hike, and suggested it could act as a pre-emptive strike, given that recent increases to trimmed mean inflation were “very small”.
Why 2027 Might Be Worse Than 2026 For Borrowers
Even though the cash rate may not go up by much in 2026, that doesn’t help us understand when they’ll start dropping again.
In announcing its decision to increase the cash rate on 3rd February 2026, the RBA Board said it “judged that inflation is likely to remain above target for some time.”
That’s primarily due to:
- Aussies spending and investing more of their money.
- More activity and higher prices in the property market.
- Continued tight labour market conditions.
- Wages growth and high unit labour costs.
If inflation doesn’t ease as quickly as the RBA would like, there’s a danger that rates could settle at a higher level, and remain there for some time.
Important!
The cycle only switches to interest rate cuts when the bank wants to encourage consumption.
Estimates of the ‘neutral’ cash rate — the level at which the economy is in equilibrium — vary depending on models used.
But in a recent speech, RBA Assistant Governor Christopher Kent said central estimates of the neutral rate had risen by around 1 percentage point on average:
The RBA noted in its November Statement on Monetary Policy (SMP) that the then cash rate (3.60%) was perhaps below the neutral rate.
(Related: Will Australia Go Into A Recession In 2026?)
In its most recent SMP, released in February 2026, the RBA cites uncertainty about whether the rate is now restrictive or not.
Economist Michael Blythe from PinPoint Macro Analytics said the lag before any noticeable impact from a rate rise can be “quite long”.
His analysis of the past 30 years of tightening cycles finds that after hiking starts:
- Inflation rates often track sideways, and house prices typically keep rising, although at a slower pace.
- GDP growth doesn’t slow much and unemployment rates usually keep dropping.
But guess what does tend to deteriorate fast? Consumer sentiment and home buyer sentiment.
Did You Know?
Sentiment scans show Australian consumers lost confidence following the recent rate hike, but it was a muted response compared to previous hikes.
5-Year Interest Rate Forecast For Australia.
Economic data shapes RBA decisions — and the data is driven by ever-changing, unpredictable domestic and global conditions.
Important!
Low rates aren’t inherently good. Five years ago, global economies were left reeling post-pandemic, and we saw a record-low 0.10% cash rate in Australia.
As RBA Governor Michele Bullock said following February’s rate hike call, we live in an uncertain world and you never know when something will happen that “might throw everything out.”
Right now, the RBA is hoping capacity pressures (less supply than demand warrants) are eased by higher rates.
Given that the RBA doesn’t expect inflation to hit the midpoint of its targeted 2%-3% range until mid-2028, it’s hard to see interest rates dropping back below 3% within five years.
Looking beyond 2026, major Australian banks differ in their views about when any cash rate cuts may arrive.
Current interest rate forecasts from Australian banks include:
| Q2 2027 | Q4 2027 | Q1 2028 | |
|---|---|---|---|
| Westpac | 4.10 | 3.85 | 3.60 |
| NAB | 4.10 | 3.60 | – |
| ING | 3.60 | 3.60 | – |
Australia’s central bank knew inflation would track higher once power bill subsidies started expiring, but it came in “materially higher than expected,” in the second half of 2025.
(Related: Why Is The Cost Of Living In Australia So High?)
Given that only some of the increase in core inflation is temporary, the RBA’s forecasts for inflation have been revised up.
Above: Despite three cuts in 2025, which were passed on in full by major lenders, Australian housing affordability remains stretched due to elevated borrowing costs.
The central bank also predicts that in coming years:
- The Australian economy will pick up in the short term due to stronger private spending, but then GDP growth will decline from late 2026 onwards. GDP growth is forecast to be 1.6% by June 2028.
- The labour market will remain a little tight for now, but unemployment will start to increase from late 2026 as GDP growth slows. The jobless rate is forecast to be 4.6% by mid-2028.
In its November and February SMPs, the RBA said the likelihood of a severe downside scenario from higher tariffs had diminished.
In May of 2025 it had modelled multiple scenarios, one of which included an escalating trade war leading to heavy job losses and a recession.
Above: Global trade tensions have had little effect on consumer sentiment in Australia.
Trade developments seem to be having little effect on consumer sentiment or business investment in Australia, and our exports have also been resilient.
But the impact of trade barriers is still a key risk identified by the RBA.
Complicating matters for the RBA is market volatility and recession fears coming out of the US.
While the US economy has proven remarkably resilient, there are cracks that could split wide open.
The US Federal Reserve’s decision to hold rates for five meetings in a row to start 2025 reflected a wariness around the near-term effects of President Trump’s tariff policies.
Important!
A cooling jobs market and rising inflation saw the Fed cut rates three times in late 2025 bringing its policy rate to 3.5%-3.75%. It held at this level at its first meeting of 2026, citing elevated uncertainty.
A number of experts have previously said that hawkish monetary policy would continue to be needed in Australia as long as ‘real’ interest rates were in the negative.
Expert Tip.
“Real” interest rate is Australia’s cash rate adjusted for inflation. Subtracting CPI of 3.8 from the cash rate of 3.85 puts real interest at just 0.05%.
Christian Baylis, of Fortlake Asset Management, told the Australian Financial Review that not raising rates in line with higher inflation had implicitly stimulated the economy.
Why The Promised 4th Rate Cut Never Happened.
The official RBA cash rate was lowered by 25 basis points in February, May and August of 2025, bringing interest rates to 3.60%.
But the monthly CPI indicator rose to 3.0% in the 12 months to August.
That dashed any hope of a September cut, but odds were still 50-50 for further easing by the RBA in November.
That is, until the September quarter CPI results were released on 29th October, 2025.
It revealed a shocking 1.3% rise in prices over the quarter.
Important!
Headline inflation rose to 3.2% — outside the RBA’s target range. Trimmed mean annual inflation increased for the first time since December 2022.
It reinforced the widespread view that an interest rate hold would be seen at the Board’s 3-4th November meeting.
And that’s what happened. The RBA said in its announcement of the November hold decision:
Nobody was expecting a cash rate cut when the Board met for the final time in December. But there was hope for at least one more cut by mid-2026, bringing the terminal cash rate to 3.35%.
Earlier in 2025, a number of pundits were even predicting the rate would bottom out at 2.85%.
(Related: Best Cryptocurrency Exchanges In Australia.)
4 Hidden Forces Driving Interest Rate Chaos.
The RBA describes the economic outlook as “uncertain”, and downside risks could emerge in 2026 that could see stronger rate increases on the agenda.
Here’s what to watch:
1. Unemployment And Wages.
The seasonally adjusted unemployment rate decreased to 4.1% in December 2025 — stronger than what was forecast.
An expected uptick in productivity hasn’t eventuated, and the RBA pointed out that “growth in unit labour costs remains high.”
Above: Real incomes recently lifted after 18 months of sharp decline, driving increased consumption.
It’s still a tight labour market. Unemployment will eventually start rising according to the RBA, but exactly how to judge labour market conditions is an area of uncertainty.
Important!
High employment levels can pressure employers to raise wages to compete, fuelling inflationary pressure without a sustainable lift in living standards.
ABS labour force data shows there was an increase of 65,000 employed people in December 2025.
The RBA’s February forecast predicts the unemployment rate will rise to 4.6% by mid-2028.
Did You Know?
Full employment doesn’t mean 100% of Australians work. In fact, there’s no defined numerical target for what constitutes full employment. The RBA assesses the maximum level required to maintain stable inflation.
2. Consumer Sentiment And Behaviours.
The RBA has repeatedly warned of the dire consequences of not returning to target inflation levels quickly enough.
In particular, if high prices become entrenched in ordinary people’s day-to-day expectations, even higher interest rates could be needed to reduce inflation down the track.
Expert Tip.
For instance, rather than cutting back, a person might make a big purchase now to avoid the expectation of having to pay more in future.
The latest Westpac–Melbourne Institute Consumer Sentiment Index, in February 2026, suggests the consumer mood is pessimistic, largely due to inflation rising and a return to cash rate hikes:
In particular, the ‘time to buy a major item’ and ‘time to buy a dwelling’ indexes nosedived by 5.6% and 6.3%.
Did You Know?
Over 80% of people surveyed now expect mortgage rates to rise over the next 12 months.
3. GDP Growth.
A robust economy, supported by GDP growth, is a great thing.
But a recent uptick in the Australian economy’s growth due to private demand, has exacerbated capacity pressures.
The latest National Accounts data from the ABS (for the September quarter 2025, released 3rd December, 2025) shows the economy rose 0.4% from the previous quarter.
That represents an annual rise of 2.1%.
Above: Aggressive rate hikes have taken a toll, with the Australian economy cooling and bolstering the case for further rate cuts in mid 2025.
A recovery in consumer spending, favourable financial conditions, and a stronger-than-expected increase in house prices have fuelled consumption. Also, there was less downside from global trade impacts.
Public and private spending are both expected to ease over coming years.
The RBA's February forecast is stronger than what it forecast in November - 2.2% GDP growth to June 2026 (compared to 1.9% previously).
The RBA thinks activity in the Chinese economy will moderate, with a GDP forecast of 4.6% in 2026 and 4.4% in 2027.
4. Global Volatility.
Domestic factors are naturally impacted by major downturns, conflicts or catastrophes globally.
Especially if they have an outside impact on our terms of trade and the cost of imported goods.
A number of economic experts think Donald Trump’s return to the White House will be bad for Australia’s economy.
Our economy is especially exposed to the risk that the Chinese economy’s performance deteriorates further, given its stressed property market and high youth unemployment rate.
Supply-side, the price of fuel, food and other goods locally could rise further depending on conflicts in Ukraine and the Middle East.
Global Interest Rates: Turning Point Or Pause?
Here’s how our central bank’s policy rate compares to other major economies:
| Australia | US | England | Canada | EU | |
|---|---|---|---|---|---|
| Current | 3.85% | 3.50-3.75% | 3.75% | 2.25% | 2.00% |
| 1 Year Ago | 4.10% | 4.25-4.50% | 4.50% | 3.00% | 2.75% |
Of the major economies’ central banks, Canada’s was the first to begin monetary policy easing, cutting its cash rate by 25 basis points at its 5th June 2024 meeting.
The European Central Bank also dropped its interest rate in June 2024 - and made seven additional cuts in the period to June 2025.
Important!
With UK inflation falling within the target range in May 2024, the Bank of England cut its cash rate by 25 basis points in August 2024 from a 16-year high. It cut a further 0.25% in November 2024, and again in February, May, August and December of 2025.
Hopes of a rate-cutting cycle beginning as early as March 2024 in the US were dashed due to four straight months of increasing inflation at the start of 2024.
The US Federal Reserve held rates for a ninth straight time at its meeting in August 2024.
An incredible sell-off across global stock markets was triggered as the data flagged the potential for a US recession.
Market losses were exacerbated by investors scrambling to exit carry trades and derivative positions in Japan after the yen appreciated in value - on the back of the Bank of Japan lifting interest rates to 0.25%.
There was talk of an inter-meeting rate cut to stave off the risk of recession.
Important!
That didn’t eventuate — but the Federal Reserve did deliver a whopping 50 basis point cut at its September 2024 meeting.
The Fed eased again in November and December 2024 by 0.25%, but Chair Jerome Powell said recently that easing was on pause, dependent on the data.
The Fed held again in March, May, June, and July 2025.
After enormous political pressure and worsening jobs data, cuts came in September, October and November of 2025. That brought the US policy rate to 3.50%-3.75% — the lowest it has been in three years.
Its outlook calls for just one cut in 2026, but Chair Jerome Powell hasn’t ruled out rate increases either.
Recent indicators the Fed will use to determine the need for future cuts include:
- A 0.3% increase in prices in December 2025, following increases of 0.3% in September and 0.4% in August.
- An unemployment rate of 4.4% in December, with just 50,000 jobs added.
- Rebounding GDP growth in the third quarter of 2025 (4.4%), after the economy contracted for the first time in three years in Q1 (-0.6%).
However, borrowing is still expensive and the world’s largest economy is facing turbulence arising from Donald Trump’s policies.
For instance, the potential for Trump’s proposed tariffs to fuel intractable US inflation — which has flow-on effects globally.
All Eyes On Rates — But Who Is Watching Fiscal Policy?
Monetary policy is not the only tool to combat inflation and, therefore, influence rates.
Important!
Fiscal policy is also vital - how the elected government intervenes to grow the economy or curtail/encourage consumption, such as through taxation, investments and initiatives.
Subsidies designed to ease cost-of-living pressures have been criticised as potentially encouraging spending, the same way stimulus cash does.
Former RBA board member Warwick McKibbin was quoted as stating:
AMP’s Dr Shane Oliver said in February 2026 that the root of increased demand is government spending, which has increased as a share of the economy ever since the pandemic.
Above: Government spending is gradually rising - despite record debt levels.
Government spending “needs to be cut to more normal levels” to ease capacity constraints and interest rates, Oliver said.
The recent ABS National Accounts data shows that government spending contributed 0.2 percentage points to GDP growth, and a further 0.2ppt via public investment.
(Compare that to contributions of 0.5ppt from private investment, and 0.3ppt from household consumption.)
Did You Know?
Rises in government expenditure were attributed to social benefits and health programs through Medicare and the Pharmaceutical Benefits Scheme.
What Is RBA's Historical Monetary Policy?
Australia’s cash rate spiked to one of its highest points of 7.5% in 2008, at the height of the Global Financial Crisis.
More recently, amid uncertainty about the impact of the COVID-19 pandemic - which first became widespread within Australia in early 2020 - the cash rate was lowered to bolster the economy.
However, as inflation started picking up, the RBA moved to start normalising interest rates again.
The RBA Governor at the time, Philip Lowe, said:
In particular, Australia’s property market saw record-breaking price increases, and supply disruptions from the pandemic and the Russia-Ukraine conflict also reduced Aussies’ purchasing power.
Inflation hit a 30-year high at the end of 2022, reaching 7.8%.
Important!
The RBA implemented an unprecedented 12 consecutive interest rate rises that kicked off in May 2022 after 16 months of the rate sitting at 0.10% since November 2020.
Prior to those hikes, interest rates hadn’t been over 4% for more than 11 years (since April 2012 when the rate was 4.25%).
The rate increase in November 2023 took the run of rises to 13.
The 4.35% rate didn’t change until February 2025 when easing inflation enabled a 25 basis point cut to be delivered, followed by two additional cuts in May and August.
Important!
In the 12 months to June 2025, inflation slowed to 2.1%, the lowest rate since March quarter 2021.
Final Thoughts On Australia’s Interest Rate Forecast.
There are too many variables and unknowns to reliably predict interest rates over the coming five years in Australia.
The easing cycle is over. But although we’ve seen one interest rate rise, it’s unclear whether we’ve entered a cutting cycle.
There may or may not be a further hike in 2026. No-one thinks rate cuts will come into play mid-2027.
The uncertainties mean the RBA will “be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions.”
Warnings are still sounding in some circles about the need to fix broader economic issues (i.e. weak productivity) - and the fact Trump’s tariffs could trigger higher inflation that could make more extreme hikes necessary.
What does it mean for your property purchasing or investment plans? Some would argue the best time to buy or invest is simply when you can afford it.
A best practice tip for anyone securing a home loan is to always budget for higher than the minimum repayments to allow for the inevitable changes in interest rates.
Jody
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