If you've noticed that every RBA decision seems to come down to inflation, you're right. Inflation is the main thing the Reserve Bank is trying to control, and the cash rate is its main tool. Understanding the link helps you make sense of where your mortgage rate might go.
What inflation is
Inflation is the rate at which prices rise across the economy. In Australia it's measured mainly by the Consumer Price Index (CPI), published by the ABS. The RBA also watches "underlying" measures like trimmed mean inflation, which strip out the most volatile price changes.
The RBA's target is for inflation to average between 2% and 3%.
Why high inflation leads to higher rates
When prices rise too quickly, the RBA raises the cash rate. Higher rates:
- Increase mortgage repayments, leaving households less to spend
- Make borrowing for businesses and consumers more expensive
- Encourage saving over spending
- Can strengthen the Australian dollar, making imports cheaper
All of this slows demand, which should ease price pressures over time.
What's driving inflation in 2026
In its September 2026 statement, the RBA pointed to:
- Energy prices: the broadening conflict in the Middle East pushed global energy prices well above earlier forecasts
- Technology goods: AI-related demand is pushing up global prices for tech components
- Domestic capacity: firms reported cost pressures and plans to raise prices
- Expectations: short-term inflation expectations remained elevated
The ABS reported annual CPI inflation of 4.0% for August 2026, driven by housing and fuel costs.
Why rates don't fall as soon as inflation dips
Monetary policy works with a lag, often a year or more. The RBA also wants to see inflation sustainably back in the target band, not just one good month. It's cautious about cutting too early and having inflation rebound.
So even when inflation starts to ease, rate cuts can take time.
What inflation means for you as a borrower
Your repayments: higher rates mean higher repayments on variable loans.
Your borrowing power: lenders assess you at about 3% above the actual rate, so higher rates reduce what you can borrow.
Your debt in real terms: inflation slowly reduces the real value of debt. Your $600,000 loan is "worth" less in today's dollars over time, especially as wages rise. That's cold comfort when repayments are rising, but it matters over a 30-year loan.
Your living costs: lenders also look at your living expenses. As costs rise, assessed expenses can rise too.
Key data releases to watch
- Monthly CPI indicator (ABS): released monthly
- Quarterly CPI (ABS): the most important release for the RBA. The September quarter figures are due on 28 October 2026, ahead of the 3 November RBA meeting.
- Wage Price Index and labour force data: a tight jobs market can keep inflation higher
What you can do
- Review your rate after each RBA move
- Build a buffer in an offset account
- Consider a split loan if you want partial certainty
- Keep an eye on your budget, since inflation affects groceries and bills as well as your mortgage
Frequently asked questions
Does high inflation always mean higher rates?
Usually, if the RBA believes inflation will stay above target. If inflation is caused by a temporary shock, the RBA might wait.
Is property a hedge against inflation?
Over long periods, property values and rents have tended to rise with or above inflation, but there are periods, like much of 2026, when values fall.
When might rates come down?
That depends on inflation returning to target. Some economists have suggested cuts are possible in 2027, but forecasts change with every data release.
Want to make sure your loan is ready for whatever happens next? Call Finfident on 0424 545 654.
This article is general information only and doesn't take into account your objectives, financial situation or needs. Figures, rates and scheme rules are current as at October 2026 and can change. Finfident Finance Brokers (ABN 94 679 280 801) is Credit Representative 569374 of Outsource Financial Pty Ltd (ACN 131 090 705), Australian Credit Licence 384324.