Introduction to Interest Rates
The Reserve Bank of Australia (RBA) has decided to keep the cash rate steady at 3.60% for the third month in a row. This decision was made at the RBA’s final meeting of the year and aligns with market expectations. The bank will now wait until at least February before making any changes to the cash rate.
Understanding the Decision
The RBA’s decision to hold the cash rate steady is due to the current inflation surge and the accelerating economy. Recent data suggests that the risks to inflation have "tilted to the upside," but the bank wants to assess the persistence of these inflationary pressures before making any changes. This means that households with a mortgage can view the outcome as a positive one, as growing concerns about persistent inflationary pressures and the RBA’s ability to manage them may lead to rate hikes in 2026.
Inflation and the Economy
The unexpected resurgence of inflation has been a major concern for the market since September. The October Consumer Price Index data confirmed that trimmed mean inflation was up 3.3% annually, which is outside the RBA’s 2-3% target range. A strong labour market, with an unemployment rate of 4.3%, will also give the RBA confidence that interest rates can stay higher for longer.
Rate Hikes Ahead?
Three of the big four banks no longer expect another rate cut this cycle, and HSBC has brought forward its forecast to anticipate a rate increase next year. Commonwealth Bank, ANZ, and National Australia Bank agree that borrowers won’t see any rate relief in the near future. Westpac still expects two further rate cuts in 2026, but this is not a unanimous view.
Home Prices Still Rising
The three rate cuts delivered earlier this year have fueled a new momentum in the housing market. Median prices rose for 11 consecutive months to reach record highs in 2025, with record growth seen in several states. Perth, Darwin, and Brisbane were the best-performing capital cities over the last year, while Sydney remains the most expensive city in the country to buy a home.
New Year Outlook
The RBA will remain "on watchful pause" until sustained patterns in data are clearer. The bank will need clear evidence that inflation pressures are easing once more before cutting rates again. With interest rates now expected to remain on hold for an extended period, affordability constraints are likely to see home price growth moderate throughout 2026.
Conclusion
In conclusion, the RBA’s decision to hold the cash rate steady is a positive outcome for households with a mortgage, as it may lead to rate hikes in 2026. The bank will continue to monitor the economy and inflation before making any changes. As the new year approaches, it’s essential to keep an eye on the RBA’s next move and how it will impact the housing market and interest rates. With the current trends and forecasts, it’s likely that home price growth will moderate, and interest rates will remain steady for an extended period.
