The interest rate outlook for borrowers in 2026 has undergone a significant shift, moving from expectations of potential relief to a landscape of considerable uncertainty. Late last year, markets anticipated a decrease in the cash rate to 3.3 per cent by year-end. However, updated forecasts from the Reserve Bank of Australia (RBA) now suggest potential increases totaling 0.6 per cent throughout the year, following the central bank’s surprise move to raise the cash rate to 3.85 per cent in February.
The February rate hike – the first since November 2023 – caught many off guard. The RBA’s decision, unanimous among board members, was prompted by a resurgence of inflationary pressures observed in the latter half of 2025. Governor Michele Bullock, in a blunt assessment, stated the Board was “uncomfortable with inflation at the level It’s.” This sentiment underscores a growing concern within the RBA regarding the persistence of inflation and a willingness to take decisive action to bring it back within the target range of 2-3 per cent.
Currently, the RBA forecasts underlying inflation to peak at 3.7 per cent by mid-2026, remaining stubbornly above the target until at least June 2028 – a considerably longer timeframe than previously anticipated. Just six months prior, in August 2025, the RBA had projected core inflation to be at 2.6 per cent by the end of that year. This deterioration in the inflation outlook has clearly influenced the central bank’s policy stance.
The reaction from Australia’s major banks has been swift. Following the February increase, three of the four major banks now expect at least one further rate hike. Commonwealth Bank (CBA) has already taken proactive steps, increasing its fixed-rate home loans significantly. In January, CBA’s three-year fixed rate jumped by 0.70 percentage points, equivalent to three standard RBA hikes. This move, along with similar adjustments from dozens of other lenders, signals a growing expectation of higher borrowing costs.
The banks’ preemptive actions on fixed rates are notable, as these rates aren’t directly tied to the RBA’s cash rate. This suggests lenders are anticipating increased funding costs and a broader shift in the interest rate environment. The implications for borrowers are substantial. Those with variable rate mortgages will likely see their repayments increase, while those considering fixed rates may find them less attractive.
The evolving economic landscape presents a complex picture. While economic growth remains modest and the labor market is relatively strong, the RBA’s primary focus remains on controlling inflation. The path forward for interest rates will depend heavily on how inflation, wages, and productivity trends unfold. Associate Professor Evgenia Dechter from UNSW Business School notes that the cash rate is “likely to stay relatively high for longer” given the persistence of inflation above the target range.
The situation is further complicated by the fact that inflation has proven more persistent than initially expected. The RBA’s cautious approach to easing rates reflects this concern. Understanding the factors influencing the RBA’s decisions – and monitoring key economic indicators – will be crucial for households and businesses alike as they navigate this uncertain period.
For homeowners and prospective buyers, the changing interest rate outlook necessitates careful budgeting and loan reviews. The possibility of further rate increases means that affordability could become an even greater challenge. Borrowers should assess their financial positions and consider seeking advice from financial professionals to determine the best course of action.
The RBA’s February decision and subsequent forecasts highlight a significant shift in monetary policy. The era of consistently low interest rates appears to be over, at least for the foreseeable future. The central bank’s commitment to bringing inflation back within its target range suggests that borrowers should prepare for a period of higher borrowing costs and increased financial scrutiny.
The impact extends beyond mortgage holders. Renters may also feel the effects of higher interest rates as landlords pass on increased costs. Savers, may benefit from higher returns on their deposits, although these gains may be offset by the broader economic slowdown. The overall economic consequences of the RBA’s actions remain to be seen, but the message is clear: the fight against inflation is far from over.
