RBA raises cash rate to 4.85% as housing downturn weighs on the economy

The Reserve Bank has raised the cash rate by 25 basis points to 4.85 per cent, adding another layer of pressure for mortgage holders and buyers already navigating falling home values and weaker economic conditions.

The increase was announced on Tuesday, 3 November, after the bank’s Monetary Policy Board concluded inflation was likely to remain high for longer than previously expected. The cash rate is now at its highest level since 2008, according to the ABC’s coverage of the decision.

The decision was not unanimous. Six board members supported the increase, while three voted to leave the rate at 4.60 per cent. That split shows the difficult balance facing the bank as it tries to reduce inflation without deepening the slowdown in household spending and housing activity.

The RBA said inflation was broadly based, rather than being limited to a small number of volatile expenses. Higher fuel and commodity prices linked to conflict in the Middle East were part of the revised outlook, but the bank also pointed to domestic cost pressures and businesses passing higher expenses on to customers.

Inflation is now expected to remain elevated through much of 2027. The RBA does not expect it to reach the top of its 2 to 3 per cent target range until late 2027, while its November Statement on Monetary Policy says inflation may not return to the middle of that range until mid-2028.

Housing is already feeling the slowdown

The RBA acknowledged that this year’s rate increases have tightened financial conditions, while home prices and property turnover have fallen significantly.

It expects higher interest rates and weaker housing conditions to weigh on dwelling investment and household consumption. In practical terms, that means fewer buyers may qualify for the amount they planned to borrow, some owners will have less money available for renovations or discretionary spending, and developers face a more difficult environment for financing and selling new projects.

The effect on individual mortgage repayments will depend on the borrower’s balance, loan term and the rate charged by their lender. Banks and other lenders make their own decisions about whether and when to change variable mortgage rates, so borrowers should check communications from their lender rather than assume the cash-rate increase will apply immediately.

For buyers, the increase creates two competing forces. Reduced borrowing capacity can limit the amount available to bid, but softer demand may also improve negotiating conditions in markets where listings are building and vendors need to meet the market.

A lower sale price does not automatically make a property more affordable if the loan needed to purchase it is more expensive. Buyers should therefore compare the full repayment under current advertised rates and allow room for further changes, rather than relying only on the difference between a property’s old and new asking price.

No promise that this is the peak

The board did not say that the tightening cycle was finished. It said it would remain guided by incoming data and would do what it considered necessary to return inflation sustainably to target.

The three votes for no change indicate there was a substantial case for waiting to see how earlier increases affect the economy. However, the six-to-three majority and the bank’s higher inflation forecasts mean borrowers should not base major property decisions on an assumption that rates will fall soon.

Existing borrowers can review their rate, offset balance, repayment frequency and refinancing options. Anyone considering switching should compare fees, cashback conditions, loan features and the longer-term rate rather than focusing solely on an introductory offer.

What it means for you

• Buyers should ask their lender or broker to reassess borrowing capacity using the latest interest-rate assumptions before making an offer.
• Variable-rate borrowers should check whether their lender passes on the increase and when a new repayment will begin.
• Sellers may need to account for smaller buyer budgets, particularly where comparable listings are competing for fewer qualified purchasers.
• Keep a repayment buffer: the RBA has not declared that interest rates have peaked.