A lot can change over 12 months.
While the Reserve Bank of Australia’s (RBA) move to hike rates in February aligned with market expectations, the rapidly shifting lending landscape has quashed any hopes that rates will drop further anytime soon.
In February 2025, inflation appeared to be cooling, with annual figures down to 2.4 per cent, although the trimmed mean measure remained just above the RBA’s target band at 3.2 per cent.
At the time, it was easy to read this as the start of a continued easing cycle, particularly after the RBA followed with further cuts in May and August.
But fast forward to now, and the picture looks less rosy for mortgagors.
Inflation has risen and proven stickier than the RBA would like, with the headline figure at 3.6 per cent and underlying inflation at 3.4 per cent for the 12 months to January 2026.
A surprise dip in unemployment has also influenced the central bank, with Australian Bureau of Statistics (ABS) figures showing the rate had fallen to 4.2 per cent in trend terms.
Mix these ingredients, and the RBA’s decision to dish out a 0.25 percentage point hike in February, taking the cash rate to 3.85 per cent, fell broadly in line with expectations.
The real question now is: what happens next?
‘Inflation still too strong’
RBA governor Michele Bullock played her cards close to her chest when she fronted the press following the decision to raise the cash rate in February 2026. While conceding that the hike would come as unwelcome news to Australia’s mortgagors, she reiterated that the decision was the “right thing for the economy”.
The RBA’s monetary policy statement provided some further insight into the board’s thinking, pointing towards “mixed signals across indicators” and uncertainty about whether financial conditions remain restrictive overall.
Bullock certainly wasn’t giving anything away when pressed as to whether this hike would be a one and done or the start of a new cycle, but she did note that conditions were “not the same” as the period of tightening seen post-COVID-19.
“Inflation is too strong. We have updated our assessment and outlook for the economy and concluded that the rate was no longer at the right level to get inflation back to target in a reasonable time frame,” she said.
“The board felt that if it didn’t raise the interest rate today, it would be signalling a tolerant inflation entrenched above target and that is not the message they want to give.”
What the majors are saying
At the time of writing, all four majors had predicted that February’s hike would be followed by more pain for mortgagors at some point in 2026. National Australia Bank (NAB) was the first to flag the prospect of more than one increase to the cash rate during 2026 and doubled down on this position after the RBA’s call.
Key to NAB’s thinking is upward revisions to the RBA’s core inflation forecast.
“A narrative which reflects an economy where private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight means that this is unlikely to be a ‘one and done’,” the bank said.
Following its decision, Commonwealth Bank of Australia (CBA) and Westpac both revised their forecasts to include an additional hike.
CBA has flagged the possibility of another 25-basis-point hike in May, which would take the cash rate target to 4.10 per cent.
Belinda Allen, the bank’s head of Australian economics, said it is unlikely the RBA will have enough evidence by that point that inflation has eased sufficiently.
“Trimmed mean inflation is expected to remain above 3 per cent through all of 2026. This is too high and will not be tolerated by the RBA,” Allen added.
Meanwhile, Westpac chief economist Luci Ellis said the bank now expects another hike in May, and although a cut at the March meeting was possible, it was far from the likely course.
“It is plausible that there are members of the board and/or the staff who see the need for tightening as more urgent, and therefore possible that some votes for a hike will be recorded in March,” Ellis said.
“Given the RBA’s published assessment of the nature of the increase in inflation, though, we do not think the majority will vote for a March hike.”
In late February, after the January CPI figures came out, ANZ changed its forecast to also back a May rate hike. Adam Boyton, ANZ’s Australian chief economist, said: “We are changing our RBA call and adding a 25bp hike in May. While the January CPI data still points to a 0.8 per cent q/q trimmed mean, the risks are now skewed to the upside and not the downside.”
However, he cautioned that “the case for May is not as clear-cut as market pricing would suggest”, noting some signs that domestic demand and shorter-run inflation momentum were easing.
If there is a rate hike in May, ANZ expects to see the cash rate “remaining at 4.1 per cent for an extended period”.
The case for May is not as clear-cut as market pricing would suggest
– Adam Boyton, head of Australian economics, ANZ
What’s next?
While the central bank meets again on 16–17 March, attention is already shifting to May, when critical data – including the March quarter CPI – labour force numbers and retail trade figures, will provide clearer direction on the rate outlook.
Then there’s the wildcard – unexpected global shocks that no one sees coming.
Every borrower with a mortgage, loan, or other form of finance will be watching closely to see whether the RBA sticks or twists in May.
Regardless of the outcome, brokers will play a pivotal role in helping clients navigate an increasingly unpredictable rate environment.
