Interest rates in Australia may not yet be high enough to slow inflation, the minutes from the RBA's latest rates decision have signalled, raising the prospect of prolonged mortgage pressure for mortgage holders.
The minutes from the Reserve Bank of Australia’s (RBA) February meeting, released Tuesday, have provided new insights into the first interest rate rise in two years.
The board unanimously voted to raise the cash rate by 25 basis points to 3.85% at its first meeting of 2026, following a stronger-than-expected pick up in inflation in recent months.
But new clues from the central bank suggest there could be more rate hikes on the horizon, with updated economic forecasts based on a technical assumption that the cash rate could rise by around 60 basis points to hit 4.45% by mid-2028.
This technical assumption is a “what-if” number the RBA uses in its forecasts. It is a starting point based on market expectations to see how inflation and growth might respond under a given scenario.
While not a prediction, this latest look into the bank’s thinking reveals plenty of continued uncertainty around forecasting.
The RBA has released the minutes from its first board meeting of 2026. Picture: Getty
The board acknowledged the expectations are “vastly different” from its assumptions in November, when it was only working off a technical assumption of a 30bps rate cut due to "a wide range of data received since the previous meeting had been stronger than expected".
"Members noted that inflation had picked up in the second half of 2025 and was currently too high," The minutes said.
"While the increase in underlying inflation was at odds with the central projection six months prior, it represented the crystallisation of what had been a growing risk highlighted by the board, most recently at the December meeting."
The RBA said while a portion of the inflation jump was due to transient factors that would "fade over time," other price pressures would be "likely to persist" with current policy settings.
The minutes also confirm concerns about strong borrowing levels and spending, as well as the effects of the strong housing market on inflation are behind the higher technical assumption.
Risks to the board’s two objectives of price stability and full employment were flagged in the minutes, along with confirmation it expects tightening will be needed to bring inflation back into its 2-3% target range.
If there is less spending, businesses can keep up with demand, or recent price spikes are revealed to be temporary, there is still an outside chance inflation could drop faster than expected, it said.
The bank flagged its concerns about strong borrowing levels and spending. Picture: Getty
“However, if demand growth continued to pick up, supply was more constrained than thought, longer term inflation expectations began to rise or policy was not restrictive, then inflation might prove more persistent,” the minutes read.
Higher rates for borrowers
For borrowers, this means the cycle of falling rates enjoyed in 2025 is over, with growing consensus among economists that the RBA will be forced to hike again as soon as May.
That would likely see borrowing rates move higher as lenders pass on any further rate hikes, limiting room for those with variable mortgages to ease back on repayments.
The board did note there were signs its policy might be “slightly restrictive” however, meaning the cash rate is high enough to slow borrowing and spending.
Households are spending an increasing amount of income on repayments compared with historical averages, it noted, meaning the bank expects people could cut back on other spending and slow the economy.
Housing market outlook
Slightly softer home price growth is also expected over the next year as interest rates stay elevated.
The latest realestate.com.au Property Market Outlook predicts home price growth of between 6-8% in 2026, which could add around $62,000 the cost of a median priced home, currently $880,000.
For those looking to jump on the housing ladder, this slower pace in home price growth this year could open the door.
Government incentives including the 5% deposit scheme and Help to Buy are also expected to ramp up market entry among first-home buyers.
Inflation and labour market pathway
The minutes reveal the bank’s forecast for inflation has been revised significantly higher compared with what was in its November monetary policy statement.
The central projection for trimmed mean inflation now peaked at 3.7% in mid-2026, with headline inflation at at 4.2%.
Reserve Bank governor Michele Bullock. Picture: Martin Ollman
Both underlying and headline inflation are projected to fall to a little below 3% by mid-2027, with the cooling in headline inflation corresponding to the ending of electricity rebates.
“Beyond that, the forecast was for inflation to fall to a little above the midpoint of the target range by mid-2028, on the assumption that the cash rate follows the market path,” the RBA said.
While unemployment ticked up at the back end of last year, the bank said ‘tightness’ in the labour market is expected to remain.
This assumption, meaning more jobs are available than workers who can fill them, puts added pressure on inflation.
The labour market is expected to remain tight. Picture: Getty
Projections are for the unemployment rate to rise from around 4.25% to around 4.5% by mid-2028. This small rise would gives the RBA some wiggle room to raise rates without immediately causing a big jump in unemployment.
The next look clues from employment data will come later this week, with the Australian Bureau of Statistics expected to publish new figures on Thursday.
Where interests do end up in the next 2.5 years will depend on how inflation, spending and jobs play out over the course of the year. What is clear however, is the risk of prolonged elevated mortgage rates is here to stay.
This article first appeared on Mortgage Choice and has been republished with permission.
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