Markets increasingly expect another cash rate increase, which would unwind 2025 cuts
A third Reserve Bank of Australia (RBA) cash rate increase in May is now widely seen as the next step in the tightening cycle, a prospect mortgage brokers say would further curb borrowing power and take heat out of housing demand.
According to Gerard Burg, head of research at Cotality, expectations for another hike have hardened following the central bank’s latest decision to lift the cash rate to 4.1%, with the next move potentially unwinding the interest rate cuts delivered in 2025.
“As widely expected, the RBA hiked rates for the second straight meeting, lifting the cash rate to 4.1% from 3.85% previously,” Burg said. “This second hike for the year represents a much more hawkish stance from the central bank, given that there has not been sufficient time following the February rate rise for any of its impact to appear in official data.”
Burg (pictured right) said the policy debate turned quickly in the lead-up to the decision, pointing to recent comments from Reserve Bank governor Michele Bullock and deputy governor Andrew Hauser highlighting persistent inflation risks, labour market tightness and economy-wide capacity constraints. He added that higher energy costs linked to conflict in the Middle East had increased inflation risks, contributing to a repricing of expectations across bank economists and markets.
On household budgets, Burg estimated the latest change would add to repayments where lenders pass through the increase in full. “In the December quarter, the average size of a new mortgage stood at around $730,000,” he said. “For a mortgage of this size, the full pass-through of this latest rate hike will increase monthly repayments by $117 per month, or $54 per fortnight.”
Burg added that serviceability would tighten further for new borrowers. “This rate increase reduces the borrowing capacity of potential buyers,” he said. “For a household earning the median income applying for a 30-year mortgage at typical market interest rates, borrowing capacity will be reduced by almost $18,000 after this RBA decision.”
Inflation data remains central to the outlook. Burg noted that headline inflation rose 3.8% year-on-year in January, while housing-related costs continued to weigh on the index. He cited electricity costs rising 32% over the year, alongside increases in rents and new dwelling prices.
Burg argued that the composition of inflation is complicating the central bank’s task, with a large share of the rise driven by administered and indexed prices that tend to respond weakly to interest-rate changes. In his assessment, bringing inflation back towards target may require market prices to slow more sharply, increasing the risk of a hard landing.
In housing, he expects tighter financial conditions to restrain demand overall, while potentially intensifying competition among more affordable properties. Cotality’s national Home Value Index rose 2.1% over the three months to February, with the lower-value quartile increasing 3.2% as buyers continued to prioritise price.
On what comes next, Burg noted that markets and major banks had moved towards a higher peak for the cash rate. “While the future direction of interest rates appears higher, there remains uncertainty as to how high,” he said.
“Pricing in the interbank cash futures market last week implied at least one further hike from the RBA this year, while the outlook from Big Four bank economists are consistent in anticipating another rate rise in May. This would fully reverse the rate cuts implemented in 2025, returning the cash rate to 4.35%.”
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