RBA lifts cash rate to 4.85 per cent, adding to commercial property pressure
The Reserve Bank of Australia (RBA) has lifted the cash rate 25 basis points to 4.85 per cent. It is the fifth increase this year, taking rates to their highest level since 2008, raising debt costs for commercial property owners and developers.
The decision was split, with six board members voting for the increase and three preferring to hold the cash rate at 4.6 per cent.
“Given the revised inflation outlook and the continuing upside risks, the Board judged that a further tightening in financial conditions is warranted to support the return of inflation to target,” the RBA said in its statement.
The rise was widely expected. All four major banks had forecast a hike after hotter-than-expected inflation data last week.
CBA’s head of Australian economics, Belinda Allen, had described it as an “insurance hike” against inflation staying higher for longer.
Why the RBA lifted the cash rate
The RBA now expects inflation to remain elevated through much of 2027 and return to the top of its 2-3 per cent target range in late 2027, around three quarters later than previously forecast.
The bank said higher fuel and commodity prices linked to the Middle East conflict were contributing to the revised outlook, alongside tighter-than-expected domestic capacity pressures. Firms were passing on higher costs or looking to do so, it said.
Figures from the Australian Bureau of Statistics showed headline inflation rose to 4.3 per cent in the year to September, up from 4 per cent in August.
Housing-related inflation rose 5.2 per cent over the year, while automotive fuel prices jumped 9.4 per cent in September alone.
The trimmed mean, the RBA’s preferred measure of underlying inflation, rose 1 per cent in the September quarter, above the RBA’s 0.8 per cent forecast, taking the annual rate to 3.7 per cent.
RBA Governor Michele Bullock told a Senate committee last week that inflation was tracking above the central bank’s August forecast as some of the upside risks it had flagged materialised.
Bullock said the labour market looked a little tighter than previously judged, even though unemployment had risen more than expected.
CoStar senior commercial property analyst Sath Peiris said while higher global oil prices are adding to inflation pressures, domestic services inflation also remains elevated at 4.1 per cent.
Peiris added that the economy was slowing under earlier rises, with unemployment rising to 4.7 per cent and housing values down for two consecutive quarters.
How higher interest rates hit commercial property
For commercial property, the most immediate impact falls directly on debt servicing.
“Higher borrowing costs mean higher holding costs for investors,” Peiris said. “It can also lower what a leveraged buyer will pay unless rents make up the difference.”
Rising interest rates also push up bond yields, narrowing the spread between property yields and funding costs, which puts downward pressure on valuations.
“Owners rolling off debt fixed at lower rates face a step-up in borrowing costs,” Peiris continued. “This hits hardest on weaker income or high-vacancy assets.”
Developers face similar pressures, with higher funding and construction costs and uncertain sale values making fewer projects viable.
Rate rises also squeeze cash flow for many small business tenants on variable-rate loans.
Sectors sensitive to interest rates and discretionary spending, including construction, hospitality and retail, are most exposed, with Peiris adding that for landlords, that means a greater risk of arrears and weaker demand for space.
Fuel-intensive tenants such as freight and logistics operators are also exposed while oil prices stay high.
The RBA nevertheless expects overall business investment to strengthen in the near term, including data centre-related investment, even as higher interest rates weigh on dwelling investment and household consumption.
Will the RBA lift rates again?
The RBA did not commit to another increase, saying future decisions would depend on the data and its assessment of the outlook and risks. But it warned of “an increasing risk that higher inflation expectations will become embedded”.
Economists are divided on whether 4.85 per cent is the peak. CBA and NAB expect the RBA to pause after November, while Westpac sees a growing risk of another rise in February. ANZ has warned the cash rate could reach 5.1 per cent in December or February.
“Another hike cannot be ruled out, amid persisting inflation pressures, both domestically and offshore from higher oil prices,” Peiris said.
