Expectations for rate cuts next year have dwindled quickly as the end of 2026 approaches, with the Reserve Bank warning households are likely to feel like they are living through a recession.
Governor Michele Bullock laid down several grim observations to Australians on Tuesday, facing media after a landmark meeting of the RBA’s monetary policy board.
Members voted 6-3 to hike the cash rate to an 18-year high of 4.85% on Tuesday in a decision that, while expected, is attracting backlash and criticism.
Mortgage holders are set to feel the pinch particularly, with repayments on a $750,000 home loan to rise by around $120 per month.
Ms Bullock used her Tuesday press conference to confirm Australia’s own domestic problems with inflation at the back end of last year are now being viewed as more damaging than previously thought.
It is consumer and government spending which has led to a misbalance of supply and demand that the RBA now says is the main reason for tightening monetary policy.
RBA governor Michele Bullock says Australians will feel they are in a recession. Picture: Nikki Short
“I want to be very clear that we are not tightening because of the direct impact of oil prices on inflation,” Ms Bullock said. “I know there is confusion in the community, so I want to be very clear.”
MPB members who voted to hold the cash rate this week wanted to wait for more information, Ms Bullock said, with natural lag meaning the four rate rises already pushed through have yet to take effect.
“Clearly, there are some members who are worried the breaking point of the economy is getting closer,” Commonwealth Bank head of Australian economics Belinda Allen said. “This is a surprise given the discussion last been of inflation being the top priority.”
The trimmed mean, which is the technical measure of underlying inflation, has sat at 3.6% for more than half a year.
This is significantly outside the 2-3% range the RBA targets for low and stable inflation and does not include the most volatile prices households are grappling with.
Extremes like fuel are left out of the calculation to provide a more comprehensive picture of inflation, instead showing up in the broader headline inflation figure, the Consumer Price Index (CPI).
CPI includes prices of transport, health, housing and food, alongside things like recreation, clothing, alcohol and communications costs.
Its trajectory has been significant this year and currently sits at 4.3% for the 12 months to September, showing just how much households are shouldering as rates have risen.
Consumers have faced rising costs for fuel, food and goods this year. Picture: Getty
“The bigger concern is that domestic price pressures remain too strong. The economy has slowed without delivering enough relief on prices,” Deloitte Access Economics partner Stephen Smith explains.
“That is a difficult outcome for households already cutting spending and businesses facing weaker sales.”
With interest rates now at levels not seen since the Global Financial Crisis, LGT Wealth Management chief investment officer Scott Haslem said there will “undoubtedly be ferocious debate” about how Australia’s economic situation has become so precarious.
Australia has become an international inflation outlier during 2026, with data platform Trading Economics placing it behind only Iceland for the highest core inflation rate among all advanced economies.
“A post-1970s-era economy birthed in government reforms through the 1980s and early 1990s, enhanced by relatively disciplined fiscal management, aided by moderate tax burdens and government debt levels that combined with rising skilled migration to drive productivity growth that was the envy of the world,” Mr Haslem said.
“Now we have the seventh highest inflation rate in the G20 and have lifted interest rates this year more than any other country in the G20.”
Recent media appearances by RBA executives have focused not just on Australia’s inflation issues but the undeniable driving force of government spending .
Speaking after Tuesday’s rate hike, treasurer Jim Chalmers said the government “takes full responsibility” for its part in the inflationary environment.
Treasurer Jim Chalmers has come under fire for government spending but has refused calls to resign. Picture: Martin Ollman
“We're helping with the cost of living in a really responsible way at the same time as we manage the budget responsibly and we try and address Australia's long-standing productivity challenge,” he said.
“Australians are already struggling, and this will stretch their budgets even further.”
How the beleaguered property market responds to the cash rate environment is becoming increasingly of interest to the Reserve Bank, following a seventh consecutive month of price declines across the country.
This most recent rate rise could force unexpected buying, selling and moving plans, Real Estate Institute of Australia president Jacob Caine says.
“The burden cannot fall on households alone. Governments must also avoid spending that adds unnecessary demand and tackle the supply constraints keeping housing costs high,” he said.
“Families are already under real pressure. Another rate rise adds to the cost of borrowing and makes it harder for people to plan their next step in the housing market.”
While the existing market remains challenged, more rate rises also spell bad news for the government’s plans for Australia’s National Housing Accord new homes target, with supply, materials and labour all affected.
Australia is set to be around 200,000 homes short of the government’s 1.2 million target, Housing Industry Association (HIA) forecasts show.
The lofty new homes target is back under renewed pressure. Picture: Getty
“Higher interest rates are reducing the capacity of households to purchase a home,” HIA managing director Jocelyn Martin adds.
Renters are also feeling the pinch, with embedded high inflation biting into every part of the property market.
“Renters have been forced to absorb rent increases for years that have left them making impossible sacrifices and no buffer as costs continue to climb,” Everybody’s Home chair Maiy Azize says.
“Now that landlords are being hit with interest rate hikes, they can pass costs on to renters.”
Many questions for governor Michele Bullock on Tuesday centred on the possibility of recession in Australia, specifically whether the bank would purposefully put the nation into recession to drive down inflation.
While the governor said this was not the bank’s plan, she warned households would feel like it was a recession and that economic growth needs to continue to slow.
Mr Haslem said softer trading updates from major Australian retailers showed growth may slow heading into what is likely to be a more subdued Christmas spending wise.
“If government expenditure actively slows over the coming year, there is a reasonable chance the RBA could be trimming the cash rate in the second half of 2027 on the back of weak growth that improves the inflation outlook,” he adds.
More subdued Christmas shopping this year could help the economy to slow. Picture: Ye Myo Khant
Global cost pressures, elevated inflation expectations and domestic capacity pressures are likely to keep the RBA on edge, with Westpac chief economist Luci Ellis expecting the bank may take a pause from tightening.
“The governor commented that after five hikes, this is probably a good time to take stock. Together with the dissents, we read this as confirming the view that the MPB will keep rates on hold in December.”
Ms Ellis acknowledge there is “considerable” data flow expected in the next few weeks which could change the forecast, but confirmed Westpac will stick to its February prediction for the next rate hike.
“We still see that as a risk rather than a base case,” she adds.
The final cash rate decision for the year will be on 8 December.
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