Reserve Bank of Australia poised to raise interest rates to 4.6%

Australia’s key interest rate is expected to hit its highest level since 2011, drag down house prices and add more than $100 to typical monthly mortgage repayments.

The Reserve Bank board is poised to hike the cash rate from 4.35% to 4.6% on Tuesday, which would be the fourth increase in 2026 and push typical home loan interest rates to 6.5%.

For someone with an average-sized new mortgage of $731,000, now paying a rate of 6.2%, an increase would add about $119 to their $4,477 monthly repayments. That would take the total rise in repayments since January to nearly $480.

The share of borrowers behind on their home loan repayments is small but rising, S&P data analysed by Westpac shows.

Household budgets have also been strained by rising petrol prices amid the US war on Iran, now 80c higher since the start of the year, adding $44 to the cost of filling up a vehicle with a 55-litre tank.

Consumer spending is already slowing, with Commonwealth Bank data showing households cut back on purchases of education, motor vehicles and household goods in August.

House prices would fall further after a fourth rate rise. Comparison website Canstar estimated a hike would cut $11,200 from the borrowing capacity of someone earning an average annual full-time wage of $108,650, taking the total lost borrowing power to $47,400.

Shrinking borrowing capacities have locked buyers out of markets. Three rate rises and the Albanese government’s investor tax reforms have seen home loan inquiries slump from nearly 15,000 a week at the start of 2026 to just over 12,000 in August and September, Equifax data shows.

Home prices around Australia have fallen more than 4% from their peak earlier this year, Cotality data shows.

On Friday, the bank predicted prices would fall 7.3% by mid-2027, then begin rising again if the RBA prepared to cut rates.

Westpac has predicted falls of 10% in Sydney and 8% in Melbourne, suggesting new buyers in some areas may find housing more affordable even after accounting for higher interest rates.

But most capital cities are not expected to see significant price drops, meaning housing affordability would not improve after accounting for higher interest rates and repayments.

When the cash rate last rose above 4.35% in 2010, inflation was 3%, housing markets were buoyant and the mining boom was boosting household incomes. Rates stayed above that level until the end of 2011.

Nearly 15 years later, the RBA is poised to return interest rates to the same level despite a weak economy and slumping house prices because inflation has persisted above the target range of 3%.

Senior RBA staff in recent weeks have highlighted the risk households could be starting to expect high inflation will endure beyond the disruptions to oil prices from the conflict in the Middle East.

Shane Oliver, AMP’s chief economist, said on Saturday the central bank was at risk of losing financial markets’ confidence if it did not raise rates again.

“After more than five years of inflation being above target, threatening RBA credibility, it does not have the luxury of continuing to wait and assess,” Oliver said.

Financial markets expect an additional cash rate rise early next year.