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The RBA Raised Rates Into a Weakening Economy. What Does That Actually Tell Us?
Today the Reserve Bank lifted the cash rate by another 0.25 percentage points to 4.60%, its fourth increase this year and the highest cash rate since 2011.
The decision was widely expected, but the backdrop makes it unusual. Property prices are already falling. Unemployment has risen to 4.6%. Manufacturing has weakened, household confidence is poor and mortgage repayments are already consuming close to a record share of income.
Yet the RBA has tightened again.
Last week I wrote about why a weakening economy and persistent inflation can exist at the same time. Today we have learned something slightly different. The RBA has now shown us how it intends to respond when those two forces collide. For the moment, inflation is still the binding constraint.
Why the RBA Raised Rates Despite a Weakening Economy
The RBA is Looking Through Some of the Weakness
The easiest way to misread today’s decision is to look at any one indicator in isolation.
An unemployment rate of 4.6% sounds weak, but employment itself still increased by almost 40,000 people in August. The unemployment rate rose partly because participation increased and the labour force grew faster than employment. That is genuine softening, but it is not the same thing as tens of thousands of jobs disappearing. Property tells a similar story: values are falling across most of the country and turnover has weakened considerably, but rents remain tight and housing costs are still adding to inflation rather than subtracting from it.
The RBA has to look through all of that and decide whether there is enough spare capacity in the economy to bring inflation back towards target. Its decision today suggests it still doesn’t think there is. Underlying inflation remains around 3.6%, above the 2 to 3% target range, and the Bank has become increasingly concerned that persistent inflation could begin influencing wage and price-setting behaviour more broadly. Today’s move takes the cash rate to 4.60%, and markets are still allowing for the possibility of further tightening.
That tells us something useful about the hurdle for eventual easing: weak housing on its own isn’t enough, weak sentiment on its own isn’t enough, and even a rising unemployment rate may not be enough if the detail underneath it still points to limited spare capacity and inflation that hasn’t genuinely turned.
Who Feels an RBA Rate Rise Most?
Where the Pain Lands Matters
Interest rates don’t affect every part of the economy equally. Mortgage holders feel them quickly, property markets feel them through reduced borrowing capacity as banks lend less against the same household income, and developers feel them through construction finance, presales and feasibility. Someone with a large variable-rate mortgage has now absorbed four increases this year; on a loan around $731,000, today’s move alone is estimated to add roughly another $120 a month to repayments, on top of the very substantial increase borrowers have already experienced since the ultra-low rates of 2021.
Other parts of the economy are far less sensitive to the same rate increase. Government infrastructure does not stop because somebody’s mortgage repayment went up. Data-centre investment does not disappear because a household cuts back on eating out. Global oil prices certainly do not fall because an Australian family cancels a holiday.
That creates an uneven transmission mechanism. The RBA is trying to remove enough demand from the economy to bring inflation down, but much of the immediate pressure lands on households, housing and interest-sensitive businesses because they are the parts of the system monetary policy can reach most easily.
Today’s increase therefore does not necessarily tell us the Australian economy is strong. It tells us the RBA still believes inflation is dangerous enough that the parts of the economy it can slow need to absorb more pressure.
What Does the Rate Hike Mean for Property Prices?
Today’s Hike Probably Deepens the Property Reset
For property, another rate increase pushes in a fairly predictable direction in the short term. Borrowing capacity falls further, repayments rise, buyer confidence weakens and development finance becomes more expensive, so some marginal buyers disappear and some marginal projects stop stacking up. That increases the risk of further price falls before this cycle finishes working its way through.
I still think the Australian property market is going through a bottoming process rather than approaching an imminent recovery, and today’s decision reinforces that view. The more interesting part, though, is what is happening underneath the falling prices. Every further decline improves affordability relative to where the market sat at the peak, and if rents remain supported at the same time, rental yields improve as well. That process is already underway.
This is why I don’t think the right interpretation of today’s decision is simply that the next property cycle has been pushed further away. The timing may have shifted, but the correction keeps changing the starting point from which the eventual recovery will begin. There is a substantial difference between monetary policy easing into an expensive market with poor yields and easing into one that has already corrected materially. Today’s hike probably creates more pain before we get there, but it may also deepen the reset that eventually makes the next cycle possible.
What Would Make the RBA Stop Raising Interest Rates?
This is probably the more useful question now. The RBA has just raised rates while unemployment is rising and property is correcting, which tells us those conditions alone are clearly not enough. I would be watching four things.
Underlying inflation needs to roll over convincingly rather than produce one or two softer headline prints. The RBA needs evidence that domestic services and housing-related inflation are genuinely easing rather than being temporarily masked by volatility elsewhere.
The labour market needs to develop real spare capacity. An unemployment rate rising because labour supply is growing faster than employment sends a different signal from employment itself beginning to contract.
Energy pressure also needs to become less threatening. The Middle East conflict and elevated oil prices remain a problem Australian monetary policy cannot solve directly. The RBA can only try to stop those price increases spreading into the rest of the economy.
Finally, domestic demand needs to weaken enough that businesses lose some of their ability to pass cost increases straight through to consumers.
When those things start moving together, the conversation around rates can change quickly. Until then, weak housing and struggling mortgage holders are more likely to be consequences of the RBA’s strategy than reasons for it to stop.
When Will the Property Market Turn? What Past Cycles Tell Us
The Next Turn Probably Happens Before it Feels Comfortable
One of the more useful lessons from previous property downturns is that markets do not necessarily wait for the first rate cut before they begin stabilising.
The 2019 cycle is relevant here, although it was not identical. Sydney and Melbourne were already showing signs of improvement before the RBA’s first cut in June, but that period also benefited from looser lending conditions and political uncertainty resolving after the federal election. It should therefore be treated as a useful precedent rather than a template that simply repeats.
What matters is the sequencing. Markets tend to turn quietly, well before the policy signal becomes obvious: prices keep falling until vendors gradually reset their expectations, yields improve as affordability becomes less stretched, and some markets begin stabilising even while the national headlines remain poor. Only then does easier credit arrive.
That is why today’s rate rise matters, but perhaps not in the way the headline suggests. Another 25 basis points probably extends the pressure on households and housing, increases the risk of further price falls and likely delays the point where credit becomes supportive. What it does not change is the mechanism that eventually ends the downturn. The longer restrictive credit keeps pressure on prices while rents remain supported by tight housing supply, the more the underlying property equation changes, with affordability improving and yields rising until the market that eventually receives lower interest rates looks increasingly different from the one being tightened into today.
The difficult part for investors is that this transition is unlikely to announce itself neatly. By the time inflation is clearly under control, the RBA has begun easing and every commentator agrees the cycle has turned, some markets may already have moved well away from their lows.
Today’s decision tells us much more about the current phase of the cycle than the next one. The RBA is still fighting inflation, property is still correcting and credit is still getting tighter. The interesting question is what another six or twelve months of that pressure does to the market underneath.
When inflation eventually gives the RBA room to ease, it will not be easing into the same property market it is tightening into today. Prices, yields and affordability will all have moved by then, and the supply pipeline may have shifted too. That is the part of the cycle worth watching, because the foundations of the next upswing can form while the current downturn still looks uncomfortable.
The next property cycle begins when improved affordability meets easier credit.
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