Rate increases are suddenly looming in a dramatic reversal
Financial markets have dramatically shifted their view on the Reserve Bank of Australia’s next move, now fully pricing in higher interest rates in 2026 rather than further cuts.
That pivot follows a run of stronger-than-expected economic data and a renewed flare-up in inflation – and it has direct consequences for mortgage strategy, borrower behaviour and the housing market.
Just a fortnight ago, traders were still divided on whether the RBA’s next adjustment would be another cut by around May. That outlook has flipped. Market pricing now implies that the easing cycle is over and that the next step is likely to be upwards sometime in 2026.
Behind the change is a batch of data pointing to an economy picking up speed rather than cooling. Inflation has reaccelerated, with annual consumer price growth lifting to 3.8% in October – well above market forecasts and clearly outside the RBA’s 2–3% comfort zone.
National accounts and household spending figures released this week suggest momentum heading into the new year is stronger than previously assumed.
That’s been enough for fixed-income strategists to conclude that investors no longer see further cuts as likely and are instead building in the risk of rate increases from early 2026.
Inflation back above the target band
The latest inflation print is central to the market rethink. Consumer prices rising at 3.8% year-on-year means the RBA is again facing an upside miss on its target band. That pushes the conversation away from “how far will rates fall?” and back toward “how long can they stay on hold – and do they eventually need to rise?”
A sustained overshoot on inflation raises the prospect of higher term funding costs for banks, a renewed upward trend in fixed mortgage rates, and less scope for sharp discounting on variable rates.
The window of ultra-cheap money that characterised much of 2025 is now at risk of closing sooner than borrowers anticipated.
First-home buyers in the firing line
The prospect of higher rates could be particularly confronting for the more than 85,000 first-home buyers who have entered the market this year. Many have benefited from three rate cuts in 2025 and have stretched to buy in a rapidly rising market.
This cohort is often highly geared and more exposed to even modest rises in repayments. Many have relied on the federal government’s expanded 5% deposit scheme to get in the door, leaving limited equity buffers if price growth slows or reverses.
Household budgets are already under pressure from cost-of-living increases; any move higher in mortgage rates could squeeze them further.
