RBA Lifts Rates to Start 2026 — What It Signals for the Years Ahead

On Tuesday, 3 February, the Reserve Bank of Australia lifted the cash rate by 25 basis points to 3.85 per cent, marking the first rate hike since November 2023. While the decision was expected — including by our team at Properties & Pathways — its implications stretch well beyond 2026 and into the shape of the market in 2027 (and perhaps beyond).

The move comes after three rate cuts in 2025 and signals a clear shift in the RBA’s assessment of inflation, demand and financial conditions.

Why the RBA Lifted Rates

In her post-meeting press conference, RBA Governor Michele Bullock was clear: inflationary pressures have re-emerged more strongly than anticipated in the second half of 2025.

Headline inflation is now sitting at 3.6 per cent year-on-year, with underlying inflation at 3.4 per cent — both above the RBA’s 2–3 per cent target band. More importantly, the Bank believes inflation will remain above target for longer than previously forecast.

The drivers are broad rather than isolated. Private demand has rebounded faster than expected, the labour market remains tight, and the economy is operating closer to its supply limits. Years of weak productivity growth have left little slack in the system, meaning even modest demand increases are translating into price pressure.

Financial conditions have also eased more than the RBA expected following last year’s rate cuts. Credit growth has picked up, housing markets have recovered sharply, and borrowing remains readily available across both households and businesses.

Was This Rate Rise Expected?

Yes — and not just by the RBA watchers in financial markets.

Money markets had priced in a strong chance of a February hike, and economists across the major banks and advisory firms had been warning that inflation data was running hotter than the RBA’s comfort zone.

At Properties & Pathways, we also expected an increase. The combination of resilient demand, strong housing momentum and rising credit growth made it increasingly difficult for the RBA to justify leaving rates unchanged without signalling tolerance for higher inflation.

The RBA Is Keeping Its Options Open

When asked about potential future rate movements, Governor Bullock repeatedly emphasised that the Board is “not ruling anything in or out”. However, the tone of the statement — and the data behind it — suggests further hikes remain firmly on the table if inflation does not moderate.

Market economists and research houses around the country don’t disagree. Many now expect at least one additional rate rise in 2026, particularly if private demand and housing activity continue to surprise on the upside.

The key point is this: policy is no longer easing. The balance of risks has shifted back toward restraint.

What This Means for Property Markets in 2026 and 2027

Higher rates don’t automatically mean falling prices, but they do change the conditions under which markets operate.

Borrowing capacity will remain under pressure, particularly if lenders continue to tighten serviceability buffers. Investor sentiment may cool, especially for highly leveraged buyers relying on short-term capital growth to justify slim yields.

That said, strong population growth, limited housing supply and solid employment conditions may continue to support prices in many segments — particularly well-located, income-producing assets.

The bigger risk sits with leverage.

Australia Loves Debt

Australia remains one of the most indebted household sectors in the world, with household debt hovering around 180 per cent of disposable income. While the major banks still dominate mortgage lending, non-bank and private lenders now play a much larger role than in previous cycles.

Private credit has grown rapidly, particularly among investors using higher-leverage strategies, interest-only loans or short-term funding structures. These facilities often come with higher rates, shorter terms and less flexibility if conditions tighten.

If rates continue to rise through 2026, borrowers with high leverage and limited buffers may find repayments increasingly difficult to manage — especially if rental growth slows or asset values plateau.

The Bigger Picture

The RBA’s message is consistent: high inflation is more damaging in the long run than short-term discomfort from higher rates.

For investors, the environment ahead rewards discipline. Conservative leverage, strong cash flow and realistic assumptions matter far more in a higher-rate world than they did when money was cheap.

While this rate hike alone won’t derail the market, it does mark a turning point in policy direction — and a reminder that the era of easy credit is not returning anytime soon.

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