RBA lifts cash rate to 4.85%, taking borrowing costs to an 18-year high

The Reserve Bank of Australia has lifted the cash rate by 0.25 percentage points to 4.85 per cent, in its seventh cash rate decision of the year.

The move takes the cash rate to an 18-year high, the highest setting since 2008.

It followed higher inflation results, with the consumer price index rising 4.3 per cent in the 12 months to September 2026, up from 4.0 per cent in the 12 months to August. Ahead of the meeting, all four major banks updated their forecasts to predict a fifth rate hike.

'Orderly adjustment', not a distressed correction

REA Group senior economist Angus Moore said the decision was expected, with the central bank still unconvinced inflation would return sustainably to target without further tightening, despite a slowing economy and an easing labour market.

"The RBA remains focused on too-high inflation, and the current housing slowdown is one of the channels through which tighter monetary policy is working to reduce household spending and demand," Moore said.

"In the near-term, higher mortgage rates and very challenging housing affordability will continue to weigh on home prices; over the longer term, structural undersupply of housing remains a long-term support for prices."

Moore said the hike would deepen the property downturn, with further mortgage rate increases squeezing borrowing capacity and pushing dwelling prices lower.

"However, the downturn, while brisk, remains an orderly adjustment driven by rising rates and affordability pressures, rather than a distressed housing correction," he said.

He said the market remained relatively stable, with low mortgage arrears, limited negative equity and many households holding substantial buffers to manage repayments.

Confidence the bigger casualty

Finni principal and mortgage broker Eva Loisance said the latest hike could hit buyer confidence harder than affordability.

"Consumers are already grappling with cost-of-living pressures and elevated mortgage repayments. Another increase risks reinforcing the perception that further pain is still ahead," Loisance told REB/SPI.

"My concern is that a further rate hike risks deepening the negative sentiment already evident in the market."

She said fragile sentiment was making buyers increasingly cautious and prolonging purchasing decisions, even as supply and demand remained key market drivers.

Investors question the numbers

Loisance said higher interest costs were squeezing investor cash flow, with weak rental growth in some markets making it harder to justify expanding portfolios despite strong rental demand.

"Higher interest costs continue to erode cash flow, and some investors are questioning whether the risk-adjusted returns justify expanding their portfolios in the current environment," she said.

For first home buyers, she said another rate rise could be the tipping point that pushes home ownership further out of reach.

"Borrowing capacity has already been significantly reduced over the past tightening cycle, and many aspiring buyers are finding that rising living costs are affecting their ability to save a deposit and service a loan at today's assessment rates."

She said weakening confidence could extend beyond property, prompting more buyers to delay purchases, reducing transaction volumes and further slowing housing activity in an economy heavily reliant on consumer spending.

"The reality is that higher interest rates don't solve Australia's inflation problem," Loisance said.

"What they do is reduce borrowing capacity, delay purchasing decisions and place additional pressure on households that are already feeling the strain."