Housing shortage, tight labour conditions forcing policymakers to change tack
The Reserve Bank of Australia (RBA)’s 25-basis-point cash rate hike on Tuesday marked a significant development for Australian monetary policy, reckons Bendigo Bank chief economist David Robertson (pictured).
“(Tuesday’s) 3.85% (hike) was no surprise by the time it was announced, but caps off an extraordinary U-turn for monetary policy compared to where we were in mid-to-late 2025 and marks the shallowest RBA easing cycle in history, only three cuts ‘peak to trough’ totalling three quarters of a percent,” he said.
While the market – and indeed every constituent of the Big Four Australian banks – expected the hike, the decision nonetheless signaled a clear change in the RBA’s tack as it continues to grapple with tight labour conditions and renewed price pressures.
RBA governor Michele Bullock suggested as much in a media conference following Tuesday's fateful rate call.
"We’ve updated our assessment and outlook for the economy and concluded that the cash rate was no longer at the right level to get inflation back to target in a reasonable timeframe," said Bullock.
"The RBA’s target for inflation is 2.5% and data for the December quarter showed year-ended headline inflation was 3.6%, and underlying inflation was 3.4%."
High inflation "hurts all Australians", she continued. "We’re trying to target inflation over the next one to two years, given the time it takes interest rate changes to flow through the economy. The outlook for inflation depends not just on the inflation number today but on the strength in demand and whether the economy has capacity to meet that demand, and on global conditions as well."
The latest job numbers in particular "changed the equation for the RBA", Robertson said.
“With unemployment unexpectedly falling in December to 4.1%, demand for labour and resulting inflationary pressures will be more persistent this year.
“These job numbers, combined with the latest CPI data, household spending, and housing trends, was all a bit too much for the RBA policy board’s risk tolerance.”
Housing undersupply showing little progress
Robertson emphasised that housing is now central to the inflation challenge, with chronic undersupply driving both rents and dwelling prices higher.
Labor’s flagship pledge to deliver 1.2 million new homes by 2029 is increasingly seen as unreachable, with key housing metrics moving in the wrong direction.
Home building approvals fell sharply in December, led by a steep decline in higher density projects, according to figures from the Australian Bureau of Statistics (ABS).
Industry bodies and economists warn this gap is structural, not cyclical.
The recent Australian Property Market Outlook 2026–2030, released by independent buyer’s agency Propertybuyer, estimates Australia could undershoot its National Housing Accord target by up to 462,000 homes.
This is leading to an inevitable spike in housing prices and rental costs.
“The latest Home Value Index from Cotality for January showed another rise for dwelling values, up over 9% in the last 12 months on average for capital cities, and over 10% for regional values, proving the pressing need to add more supply hasn’t abated,” Robertson noted.
Strong dollar good for inflation?
Robertson drew attention to a turbulent start to 2026 on the global stage, with rising geopolitical tensions around the world.
The Australian dollar has been one of the beneficiaries of this instability, having risen to almost 71 cents against the US dollar last week before a pullback, along with commodity prices.
“The higher exchange rate is something we have forecast for some months, but this rally has been slightly ahead of schedule, much like the timing of RBA rate hikes, which we had expected in 2027 rather than this year,” he said.
“More positively, the higher exchange rate will be helpful for inflation and is one of the reasons we still expect stable RBA rates for the balance of 2026, leading into a jump in growth and productivity for our economy in Financial Year 2027, assisted by the recent uplift in tech business investment.”
