Ayan Tripathi
Higher rates return as inflation remains sticky
In a unanimous decision, the Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points to 3.85%. The decision follows a hot inflation print, with the Consumer Price Index rising 3.8% over the year to December, alongside a labour market that remains stubbornly tight as unemployment fell to 4.1% in December. This marks the first rate hike since November 2023, while making the RBA the first central bank to raise rates in 2026. Markets responded favourably, with the Australian Dollar nearing a three-year peak of US$70.94, helped by a widening interest rate gap between Australia and overseas nations. Higher domestic rates improve the attractiveness of Australian assets, encouraging capital reallocation while stimulating the Australian dollar.
Households, however, are worse off, as monthly repayments are tipped to rise by more than $200 in capital cities. Even worse, trimmed mean inflation is expected to return to the middle of the 2-3% target band by mid 2028, likely corresponding to higher rates, for a longer period of time. That outlook has begun to shape expectations as the cash rate could rise to 4.2% by year-end, according to Harry Murphy Cruise, head of economic research and global trade for Oxford Economics Australia.
How can this analysis be applied to HSC Economics?
This analysis can be utilised to “analyse the effects of contractionary monetary policy on the Australian economy”, a somewhat common short-answer question. First off, students need to understand the two main goals of monetary policy: inflation between 2-3% and the achievement of full employment. From here, it’s imperative for students to show an understanding of the transmission mechanism of monetary policy.
In line with the analysis above, students can link the recent cash rate hike to 3.85% to lower inflation. This is because a higher cash rate raises general interest rates, meaning households face higher mortgages and therefore consume less through lower incomes. This then reduces Aggregate Demand relative to the level of Aggregate supply, which weakens demand-pull inflation.
Cheaper Australian homes drive price growth as top-end prices flatline
In its recent update, Cotality’s national Home Value Index rose 0.8% in January, pushing the national median dwelling value to $912,465. However, things are a little more interesting considering that price growth in most cities was driven almost entirely by cheaper homes, with lower-quartile home values jumping 1.3% compared to the 0.3% increase across the upper quartile. According to Cotality’s research director Tim Lawless, this reflects “intense competition” in the lower quartile where “first home buyers, investors and, progressively, mainstream demand is most concentrated”.
That pressure is amplified by a shortage of homes for sale. Listings are down 19% year-to-date and sit 25% below the five-year average, leaving buyers chasing too few properties. Ray White economist Nerida Coinsbee chalks up low housing inventory to high government spending on infrastructure, which has pulled “trades and resources away from building houses”. However, the Australian housing market could face less heat in 2026, as Domain expects property price growth to slow to 6-8% following the recent 0.25% rate hike, which pushed the cash rate to 3.85%.
How can this analysis be applied to HSC Economics?
This analysis can be utilised to “explain recent trends in the distribution of income and wealth”, a somewhat common short-answer question. In terms of structure, it’s ideal for students to consider a dimension within the distribution of income and wealth, such as education, occupation or age. It’s also important for students to have an understanding of different assets like housing and stocks, and how they account for wealth in Australia.
Putting this together, students can show how the housing crisis has skewed the distribution of wealth to older age groups, particularly through access to higher-value housing as a result of their income accumulation. Likewise, younger age groups with lower incomes are forced to increasingly demand lower-value homes, which is of little benefit to their wealth.