At the end of last year, we launched Rateline. A feature article that will come out in the Landline edition immediately following each RBA Board meeting. See link here for December’s article.
In these articles, we will unpack the RBA Board’s recent decision on their target cash rate, discuss the key market drivers and consider what it means for borrowers. There will also be a feature article that focusing on an important component of the finance system. In this article it will be APRA’s role in the financial system and some recent changes for residential lending.
If you would like more information on what you read in these articles or would like to discuss your own financing arrangements, then please reach out to one of our lending consultants.
RBA Announcement
On the 3rd February, the RBA, Board increased the official cash rate by 25 basis points (0.25%) to 3.85%. The main concern was Australia’s inflation rate, which continues to trend upward. The Consumer Price Index (CPI) rose to 3.8% in the December quarter, up from 3.2% in the September quarter.
The next RBA Board announcement will be on the 17th March.
Summary of key data – Businesses confident but consumers are hurting
| Recent | Previous | Reporting Periods | Comments | |
|---|---|---|---|---|
| Real GDP Growth | +0.4% | +0.6% | Sept and June Quarters | Slowing |
| Headline CPI (annualised) | +3.6% | +3.2% | Dec and Sept Quarters | Well above target range |
| Core (trimmed) CPI (annualised) | +3.4% | +3.0% | Sept and June Quarters | Above target range |
| Unemployment Rate | 4.1% | 4.1% | Jan26 and Dec25 Months | Tight |
| Underemployment Rate | 5.9% | 5.7% | Jan26 and Dec25 Months | Slightly looser |
| Wage Growth | 0.8% | 0.8% | Dec and Sept Quarters | Stable |
| Household Spending | +0.5% | +0.9% | Sept and June Quarters | Decreasing |
| Consumer Confidence (Westpac-MI Index) | 92.9 | 94.5 | Jan26 and Dec25 Months | Deeply pessimistic |
| Business Spending | +6.4% | 0.2% | Sept and June Quarters | Huge rebound |
| Business Confidence (NAB survey) | +3 | +3 | Jan26 and Dec25 Months | Cautiously confident |
Inflation has rebounded strongly to 3.6% headline CPI and 3.4% core (trimmed) CPI. Both inflation rates are well above the RBA’s target range of 2-3% and trending up. This is a major concern for the RBA hence they moved quickly from a cycle of cutting rates to increasing rates.
The labour force remains tight, the economy continues to grow steadily, and business confidence is healthy, affording the RBA some wriggle room to increase rates without fear of denting the overall economy too much. However, the move from cutting rates to increasing rates will have a big impact on mortgage holders, of which approximately 25% were already struggling with mortgage stress due to a continued drop in real wages (inflation is greater than wage growth). This has flowed through to a sharp decrease in household consumption and consumer confidence from a year ago.
The unfortunate fact of the matter is the RBA needs to see consumers squeezed to slow spending and slow inflation. The RBA only has one lever to pull and that is interest rates. It is a blunt, indiscriminate tool that impacts heavy borrowers (e.g. mortgagees) the most. It is akin to swatting a fly with a cricket bat. Eventually, the RBA will get the fly, but a lot of furniture will get broken in the process. Other areas of the economy need to do more of the heavy lifting, such as reducing Government spending (stops putting extra fuel on the inflationary fire) and increasing productivity efficiency (reduces costs of goods and services and leads to real wage growth). According to the latest Productivity Commission Annual Bulletin (released February 19, 2026), the nation is currently in the midst of a “productivity slump.”
The next RBA Board announcement will be on the 17th March. The market is currently pricing in a 9% chance of a 0.25% hike in the cash rate and a 91% chance of a hold. The key data the RBA will be watching is inflation, consumer spending, and confidence. The RBA will be wanting to give the recent rate increase some “transmission” time to see if it has had the desired effect of squeezing households and slowing their spending. The 5th May RBA board meeting is more likely when another interest rate increase will be seriously discussed.
Feature article – The role of the Australian Prudential Regulation Authority (APRA)
As mentioned above, the RBA attempts to guide economic activity via the changing of interest rates, but this is a very blunt instrument. Another Government agency that plays an important role in guiding and supporting the economy is APRA. Its main role is setting standards for and supervising financial institutions involved in banking, insurance and superannuation. Its responsibilities include ensuring that financial institutions are well run, have adequate capital, and that their clients are protected. APRA also set lending standards for mortgages to tighten or loosen the housing market.
There have been several recent changes in mortgage lending standards.
The serviceability buffer
To ensure mortgagees can service their mortgages when interest rates go up, APRA requires banks to stress test their borrowers using current interest rates plus a buffer. In 2021, when the new stress test was implemented, the buffer was 2.5%. This was later increased to 3% as pandemic interest rates dropped sharply. With interest rates significantly higher than in 2021 there has been pressure on APRA to reduce the buffer, Still, APRA have indicated they have no intention of reducing the buffer while the property market remains hot.
Debt to income (DTI) caps
In February 2026, APRA brought in a cap for on how much mortgagees could borrow with respect to their gross income (i.e. how leveraged they could be). The cap has been set at 6 times gross income. Banks can exceed this cap for some borrowers, but it is limited to 20% of the banks total new lending. The DTI cap only applies to the residential housing market but is equally applied to both investors and owner-occupiers. Investors generally have higher DTI’s so banks will most likely have to turn the tap off for investors before owner-occupiers.
