Most Australians know that the Reserve Bank of Australia sets interest rates — but fewer understand why rates move when they do. The answer comes down to two numbers watched more closely than any other: inflation and employment. Right now, both are telling a story that directly affects your mortgage repayments, your borrowing power, and the Sydney property market. Here's how to read them.
The RBA's Two-Part Job
The Reserve Bank has a dual mandate: keep inflation between 2–3%, and support full employment. Every rate decision is essentially the RBA trying to balance these two goals.
When inflation runs too hot, the RBA raises rates to cool spending and reduce price pressures. When unemployment rises too fast, it cuts rates to stimulate the economy and get people back into work. The challenge — and the reason rates move so much — is that these two goals can pull in opposite directions.
Where Inflation Stands Right Now
Australian inflation (CPI) came in at 3.6% for the December quarter 2025 on a headline basis, with underlying (trimmed mean) inflation at 3.4% — both above the RBA's 2–3% target band.
That might not sound alarming, but the trend direction matters as much as the number. After falling consistently from its 2022 peak, inflation picked up materially in the second half of 2025 — a reversal that caught the RBA off guard and directly triggered the two rate hikes we've seen in 2026.
The RBA's own forecasts, published in its February 2026 Statement on Monetary Policy, project:
- Headline CPI peaking at 4.2% by June 2026
- Trimmed mean peaking at 3.7% by mid-2026
- Underlying inflation not returning to the 2.5% midpoint until "at least the second half of 2028"
The key drivers pushing inflation higher include stronger household spending, low productivity growth (Governor Bullock described this as a structural problem in her speech "Listening to Australians, Interpreting the Data and Setting Monetary Policy" on 3 March 2026), elevated fuel prices from the Middle East conflict, and ongoing wage pressures.
What Is Trimmed Mean Inflation?
The RBA focuses on "trimmed mean" (underlying) inflation rather than headline CPI. It strips out the most volatile price movements — like fuel and fresh food — to show the underlying pressure on prices. When the trimmed mean is above 3%, the RBA is in tightening mode.
Where the Jobs Market Stands
Fresh data released today (19 March 2026) by the Australian Bureau of Statistics shows the seasonally adjusted unemployment rate rose to 4.3% in February — up from 4.1% in January and above market expectations of 4.1%. This is the first meaningful sign that the labour market is beginning to soften.
That matters for one key reason: a loosening jobs market gives the RBA reason to pause. When unemployment rises, wage pressures ease, consumer spending slows, and inflation tends to follow. The RBA has consistently said it will be "attentive to the data" — and today's data is exactly the kind of signal four of the nine board members who voted to hold in March were waiting for.
The RBA's own forecasts (from February 2026) had projected unemployment rising only gradually:
- June 2026: 4.3%
- December 2026: 4.3%
- December 2027: 4.5%
February's 4.3% figure has arrived ahead of the RBA's own schedule — reaching the June forecast level three months early. While one month's data isn't enough to change course, it will feature prominently in the Board's deliberations ahead of the May meeting.
The Inflation–Employment Connection
| Economic Signal | What It Means for Rates |
|---|---|
| Inflation above 3% + tight jobs market | RBA hikes rates |
| Inflation falling + jobs market weakening | RBA holds or cuts |
| Inflation above target + unemployment rising | RBA faces a dilemma — likely holds |
| Inflation at 2.5% + unemployment at ~4.5% | RBA in "neutral" — unlikely to move |
How We Got Here: The 2025–2026 Reversal
Understanding the current moment requires a quick look at the last 18 months. After hiking aggressively in 2022–2024, the RBA cut rates three times in 2025 — in February, May, and August — bringing the cash rate down from 4.35% to 3.60%. Borrowers got relief. Property markets bounced. Sentiment improved.
But the cuts came with a consequence: they added fuel to an economy that was already running warmer than expected. Spending picked up, credit grew strongly, and inflation — which had been falling — reversed course in the second half of 2025.
The RBA's response was to reverse course. Two hikes in early 2026 — February and March — have brought the cash rate back to 4.10%, the same level it was at before the 2025 cuts began.
Recent Rate History
| Date | Decision | Cash Rate |
|---|---|---|
| August 2025 | Cut –0.25% | 3.60% |
| December 2025 | Hold | 3.60% |
| 3 February 2026 | Hike +0.25% | 3.85% |
| 17 March 2026 | Hike +0.25% | 4.10% |
| 4–5 May 2026 | Next meeting | ? |
Source: RBA Cash Rate Statistics
What This Means for the Sydney Property Market
Higher rates cool property markets — not immediately, but measurably. After the February 2026 hike, Sydney's monthly price growth went to flat (0%), with the rolling quarter edging down 0.1% according to Cotality (CoreLogic) February 2026 HVI data. Melbourne showed a similar pattern.
This contrasts with mid-size cities like Perth (+2.3% monthly), Brisbane and Adelaide — which are still rising. The rate-sensitive, high-priced Sydney market tends to feel rate movements faster and harder.
The broader picture: Sydney home values are up 31.1% over the past five years (Cotality February 2026 HVI), while nationally the annual growth rate is tracking around 9.9%. Even with recent flattening, prices remain well above pre-pandemic levels — meaning deposit requirements and loan sizes are bigger, and the impact of every 0.25% rate move is larger in dollar terms.
What Each 0.25% Hike Adds to Your Repayments
| Loan Balance | Extra Per Month | Extra Per Year |
|---|---|---|
| $500,000 | +$75 | +$900 |
| $750,000 | +$112 | +$1,344 |
| $1,000,000 | +$160 | +$1,920 |
| $1,250,000 | +$200 | +$2,400 |
Approximate figures based on a 30-year principal-and-interest loan at a variable rate of approximately 6.00% p.a. (the current average owner-occupier variable rate post-March hike, per Canstar). Actual impact varies by lender, remaining term, and loan type. The two 2026 hikes combined add double these amounts.
The May 2026 Decision: What to Watch
The next RBA meeting is 4–5 May 2026. All four major banks — ANZ, NAB, CBA and Westpac — are currently forecasting a further 25bp hike in May, which would bring the cash rate to 4.35% and fully unwind the 2025 rate cuts.
That said, the picture is less certain than it was a week ago. Two pieces of data now point toward a possible pause:
- February employment data (released today, 19 March) — unemployment rose to 4.3%, above expectations and ahead of the RBA's own forecast schedule. This is the first sign the labour market is softening.
- March quarter CPI (due late April 2026) — if trimmed mean inflation shows any sign of easing, the case for a May pause strengthens considerably.
The March 2026 decision was a close 5-4 vote, with four board members preferring to hold. One or two more soft data points before May could be enough to tip the outcome. The RBA has said it will be guided by the data — and the data is starting to tell a more nuanced story.
What This Means for You as a Borrower
- If you're on a variable rate: Standard variable rates are now sitting around 6.00% p.a. for owner-occupiers following the March hike (per Canstar). You've absorbed two 0.25% hikes in 2026 already. Now is a good time to review whether your current rate is competitive — lenders are still competing for business, and switching or negotiating can offset some of the RBA's impact.
- If you're buying: Flattening Sydney prices could be a window of opportunity, but borrowing capacity has tightened with every hike. At 4.10% cash rate (and ~6.00% variable), you can borrow meaningfully less than you could at 3.60% in August 2025. Use our borrowing power calculator to know your numbers before you make offers.
- If you're a first home buyer: Government schemes — the First Home Guarantee (5% deposit), Help to Buy shared equity, and the NSW First Home Owner Grant — are worth understanding properly in this environment. They don't lower rates, but they can reduce the deposit and loan size needed.
- If you're considering refinancing: Rates are back at 4.10% cash rate — the window of 3.60% has closed. But competition between lenders means some are still offering significantly below the standard variable rate. A broker review costs nothing and can quickly tell you if you're overpaying.
Key Economic Dates to Watch
- Late April 2026 — March quarter CPI release (the most critical data point before May)
- 4–5 May 2026 — Next RBA Monetary Policy Board meeting
- Mid-May 2026 — April employment data
Written by Amit Narang, Mortgage Broker | Credit Representative 558902 of Outsource Financial Pty Ltd (ACL 384324)
Sources: RBA February 2026 Statement on Monetary Policy; RBA Media Releases mr-26-03 (February 2026) and mr-26-08 (March 2026); Governor Bullock, "Listening to Australians, Interpreting the Data and Setting Monetary Policy," 3 March 2026 (rba.gov.au); ABS Labour Force, Australia, February 2026 (released 19 March 2026); ABS Consumer Price Index, December Quarter 2025; Cotality (CoreLogic) Home Value Index, February 2026; Cotality Monthly Housing Chart Pack, March 2026; RBA Cash Rate Statistics (rba.gov.au); Canstar variable rate data, March 2026
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