Western Australian households are facing renewed financial pressure after the Reserve Bank lifted interest rates, confirming earlier warnings that stubborn inflation and housing costs would force further action.
The Reserve Bank of Australia (RBA), on Tuesday, increased the cash rate by 25 basis points to 3.85 per cent, citing rising demand, capacity pressures and inflation remaining above its target range.
In its statement, the RBA said inflation had “picked up materially in the second half of 2025” and was likely to stay above the 2–3 percent target for some time, despite easing from its 2022 peak.
Activity and prices in the housing market were continuing to strengthen, the Bank said, while labour market conditions remained “a little tight” and private demand had grown more strongly than expected.
Warnings proved accurate
The decision follows new data from the Australian Bureau of Statistics showing inflation rose to 3.8 per cent nationally in December, while Western Australia recorded a higher rate of 4.4 per cent, one of the highest in the country.
Housing and energy costs were key contributors, with WA housing costs rising 8.6 per cent over the year and rents climbing 6.2 per cent.
Before Tuesday’s decision, Michael Dockery from the Bankwest Curtin Economics Centre warned the Reserve Bank was running out of patience.
“Inflation had looked like it was coming down into the target range, but we’ve now had three months where it’s gone the other way,” Professor Dockery said earlier.
“That completely changes the discussion.”
He said persistent price pressures and strong employment left policymakers with limited room to delay.
Mortgage holders feel the impact
The RBA acknowledged that earlier interest rate reductions had not yet fully flowed through the economy and that financial conditions may no longer be restrictive, prompting the need for further tightening.
The Curtin expert said the Reserve Bank’s concern about demand and capacity pressures aligned with what economists had been warning about late last year.
“One of the most important things in controlling inflation is managing expectations,” he said.
“If people start to lose confidence that the Reserve Bank will keep inflation below three percent, the job becomes much harder.”
Professor Dockery added that higher interest rates would disproportionately affect mortgage holders, particularly in fast-growing urban areas.
“Monetary policy is a very blunt instrument,” he said.
“It largely requires mortgage holders to feel the pain in order to slow the economy.”
For households, the impact will be felt most sharply by those with variable mortgages, who now face higher weekly repayments and less discretionary income.
Confidence hit for households and small business
CPA Australia said the rate rise would compound existing cost-of-living pressures and further strain already tight budgets.
CPA Australia Business and Investment Lead Gavan Ord said the decision, while not unexpected, would be a blow for borrowers who believed the rate cycle had peaked.
“Borrowers who had been encouraged by recent rate cuts will be deeply disappointed, particularly households coming off long-term fixed rates who are now facing much higher repayments,” Mr Ord said.
He said small businesses were also under pressure from higher borrowing costs, rising inflation and low consumer confidence.
“For many, there are no easy options left,” he said.
CPA Australia warned consumers could see further flow-on effects, with businesses likely to pass on rising costs or scale back investment and growth plans.
What happens next
The Reserve Bank said it would remain “attentive to the data” and developments in the global economy, domestic demand, inflation and the labour market when making future decisions.
Professor Dockery said households should not assume the rate cycle was over.
“The bigger risk is waiting too long and then having to push rates up more aggressively later,” he said.
With inflation still above target, housing costs elevated and borrowing becoming more expensive, households and businesses across Western Australia are now adjusting to the reality that interest rates may stay higher for longer.
