Reserve Bank to decide on rate rise amid fears of higher mortgage repayments

Mortgage holders face the brutal reality of interest rates rising from Tuesday as experts weigh up whether spiking inflation is a “temporary blip” or the “devil” has returned.

With inflation accelerating and the number of Aussies in the workforce on the rise, experts are divided as to what it will mean for interest rates.

On Tuesday, the Reserve Bank of Australia (RBA) will inform homeowners and savers whether the cash rate has been hiked by 25 basis points to 3.85 per cent or will remain on hold.

Ahead of Tuesday’s announcement, the money market has put a 75 per cent chance on an interest rate hike.

Capital.com senior financial market analyst Kyle Rodda said he expected the RBA to take a slow and cautious approach to lifting rates.

“Inflation data was too spicy, but the trimmed mean was as expected and the central bank won’t want to be seen as jumping at shadows,” Mr Rodda said.

Why the RBA could hold rates

AMP chief economist Shane Oliver was one of the few economists calling for a hold, pointing out inflation was trending down over the last 12 months and the RBA could be patient.

“I lean into the view that the (inflation jump) is more of a blip than a chronic problem,” he told NewsWire.

“If you look at the trimmed mean inflation, it has actually stepped down over the last six months … which suggests to me that is more a blip.”

InvestSmart chief executive Ron Hodge agrees, adding four reasons why he believes interest rates should remain on hold on Tuesday.

“Inflation remains elevated, but the forces driving it over the past year are starting to unwind,” Mr Hodge said.

“The RBA is far more likely to pause and wait for those changes to flow through the economy than risk overtightening.”

Falling electricity prices: Wholesale electricity prices in the National Electricity Market dropped 44 per cent in the December 2025 quarter compared with the previous year, driven by record renewable energy generation.

Stronger Australian dollar: The currency’s rise above US70 cents is reducing the cost of imported consumer goods, creating a disinflationary effect.

Labour market uncertainty: Despite unemployment falling to 4.1 per cent, the emerging AI revolution threatens significant job disruption.

Policy stability: After only recently loosening monetary policy, tightening again so quickly risks “policy whiplash” and could undermine the RBA’s credibility.

NED-9108-Monthly-Inflation-Indicator

Why the RBA could lift interest rates

The case for lifting rates has strengthened considerably following two successive quarters of higher-than-expected inflation, which came in at 3.8 per cent for the 12 months until December.

The all-important trimmed mean inflation rate, which strips out volatile items and the RBA uses to get a gauge of where inflation is heading, was 3.3 per cent in the 12 months to December 2025, up from 3.2 per cent in the 12 months to November 2025.

Commonwealth Banks chief economist and head of global economics markets research Luke Yeaman said the RBA was right to initially wait on interest rates, but the “game had changed”.

“Today, with trimmed mean inflation sitting well above the target band for two quarters, a strengthening economy and falling trend unemployment, the case for action is compelling and the risk of hesitating is large,” he said.

Also boosting rate hike prospects is stronger-than-expected employment data, which shows Australians without a job fell from 4.3 to 4.1 per cent.

While an improving jobs market is a positive for an economy, it can lead to higher consumer spending, which lifts inflation.

CreditorWatch chief economist Ivan Colhoun said the strong jobs number adds to the case for an interest rate hike.

“Signs of stronger consumer spending and continuing very low unemployment are important background considerations, suggesting the RBA staff could not credibly forecast a return of inflation to target without policy action,” Mr Colhoun said.

He warned that if the RBA raises rates on Tuesday, it would likely lift them a second time at one of the next two meetings.

“Allowing the cost of living to continue rising at above 3 per cent rates does not help either consumers or businesses in the long run,” he said.

EQ economics managing director Warren Hogan told Sky News that Australia had got its policy settings wrong and needed to reverse course on rates.

“What I mean by that is our broad monetary policy, (including) where interest rates are and both what federal and state governments are doing with their budgets,” he said.

“Inflation is the devil when it comes to the operation of an economy. The longer we leave it, the worse the economic downturn we will have to experience.”

What it means for mortgage holders

Homeowners on the average home loan of $693,802 will see an annual increase of $1313 to their mortgage repayments if the RBA raises the cash rate by 25 basis points on Tuesday.

Finder data shows a mortgage holder owing $500,000 will need to pay an additional $79 a month or $948 a year, while those in a $1m debt will have to pay an additional $158 a month or $1895 a year should the banks pass on the rate hike.

If rates go up by 25 basis points, Roy Morgan data suggests 41,000 additional Australians mortgages will be “at risk”, with 1,228,000 mortgage holders feeling the pinch.