In lifting its official cash rate by 0.25% back to 3.85% in February, the Reserve Bank of Australia (RBA) sent a clear signal that Australian borrowers should expect higher interest rates for longer.
The simple reason: inflationary pressures have accelerated materially over recent months, and the inflation rate is likely to remain above the central bank’s 2-3% target band through 2026 into next year.
“On balance, the RBA’s policy stance remains highly data‑dependent,” says Vanguard Senior Economist, Grant Feng. “Any future adjustments will hinge on whether underlying inflation continues moving toward the target – or instead exhibits renewed, persistent signs of acceleration.”
Together with the acceleration in price pressures, Dr. Feng says the more concerning development is the broad‑based nature of the inflation pickup, particularly in components that tend to be more persistent.
“Housing‑related categories, including construction costs and rents, have recorded strong gains over recent quarters. Given the structural difficulty of expanding housing supply quickly, these categories tend to be stickier and contribute materially to sustained underlying inflation.”
Dr. Feng says Australia’s economic challenge remains heavily supply‑driven.
Weak productivity growth has lowered the economy’s potential growth rate, meaning capacity constraints are binding even at moderate output growth. The unemployment rate at 4.1% sits below the RBA’s estimate of full employment, and capacity utilisation reached 83.2%, well above its long‑run average.
“Under these conditions, even a modest lift in demand can interrupt the earlier disinflationary trend,” Dr. Feng says.
“Meanwhile, the labour market remains tight by historical standards. Combined with sluggish productivity, this environment keeps unit labour costs elevated, making the disinflation process slower and more stubborn.”
The outcome for borrowers
Lenders are likely to start passing through the RBA’s rate rise fairly quickly to both existing and new borrowers.
Research group Canstar estimates the 0.25% rise will add around $90 per month to the mortgage repayments on a variable rate home mortgage of $600,000 with 25 years remaining.
Impact of an RBA hike in February on minimum monthly repayments
| Loan Size | 0.25%-point hike | New repayment |
|---|---|---|
| $500,000 | +$75 | $3,151 |
| $600,000 | +$90 | $3,782 |
| $700,000 | +$105 | $4,412 |
| $800,000 | +$120 | $5,042 |
| $900,00 | +$135 | $5,673 |
| $1 million | +$150 | $6,303 |
Source: Canstar.
Notes: Based on an owner-occupier paying principal and interest with 25 years remaining in February 2026 at the RBA average existing customer variable rate. Calculations assume banks pass on each hike in full to existing variable customers the month after.
What borrowers could do
The most obvious approach for existing borrowers is to approach their lender to see if they are willing to offset some or all of the RBA’s interest rate hike.
Mortgage rates are typically highly competitive, and lenders will often match the rates offered by other providers to avoid losing loan customers.
The alternative is to shop around for a better loan deal with another provider offering a lower rate.
Loan refinancing activity by owner-occupiers and investors has already been on the rise over recent quarters.
Australian Bureau of Statistics (ABS) data shows owner occupiers collectively refinanced $66.1 billion of mortgages over the September 2025 quarter, seasonally adjusted, either through their existing lender or external lenders.
Separately, the ABS data shows investors refinanced a further $34 billion over the quarter, seasonally adjusted, either through their existing or external lenders.
Value of refinanced loan commitments, seasonally adjusted, Australia
| Refinanced | Sep Qtr 25 $b |
Jun Qtr 25 to Sep Qtr 25 % change |
|---|---|---|
| Owner Occupier Internal |
24.8 | 6.5 |
| Owner Occupier External |
41.3 | 2.1 |
| Investor Internal |
9.5 | 14.0 |
| Investor External |
24.5 | 9.7 |
Source: ABS
“Looking ahead, we expect quarterly trimmed mean inflation to remain above the RBA’s 2–3% target band, though further gradual moderation is likely as tighter policy works through the economy,” Dr. Feng says.
“Given this backdrop, the RBA is expected to lean more heavily on its price‑stability objective, maintaining a “higher‑for‑longer” stance with the policy rate ending the year at 3.85%.”
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) is the product issuer and operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee and product issuer of Vanguard Super (ABN 27 923 449 966).
