Rate hike warning: Strong economy means more pain for homeowners

Frustrated mortgage holders could be in for a rude shock with the national economy running “too quickly for comfort”.

Ahead of the official release of Australia’s gross domestic product, economists warn demand is likely outstripping supply, leading to higher inflation and ultimately further rate hikes.

Commonwealth Bank forecasts the Australian economy surged 1 per cent in the final three months of 2025 and a robust 2.7 per cent for the calendar year.

Commonwealth Bank economist Harry Ottley told NewsWire that while it was a “good thing” the national economy had bounced back faster than anticipated, the rapid rebound had created challenges.

“Overall our sense is the economy is growing a little too quickly for comfort and as a result we think the Reserve Bank will increase interest rates in May, we also think there is a decent chance they go in March, but that is not our base case,” he said.

Reached supply capacity

Commonwealth Bank forecasts household spending is likely up 0.7 per cent, while business investment will likely be up by 0.3 per cent. Government spending is tipped to come in at 0.9 per cent for the quarter.

“It caught most people by surprise how strong the rebounds have been, but it does add to capacity constraints in the economy,” Mr Ottley said.

The major bank says the national economy is now growing at 2.7 per cent.

The Reserve Bank of Australia predicts anything above 2 per cent would add to inflation, while CBA says the supply constraint is closer to 2.1.

Oxford Economics Australia lead economist Ben Udy said demand picked up over the last six months.

“The economy has been growing really strong and demand is outstripping supply and that is passing through to higher prices and that is why the RBA is reacting,” he said.

“They are trying to slow the pace of demand while supply has the chance to catch-up.”

Mr Udy said Australia’s interest rates were simply too low.

“We are expecting one more rate hike from the RBA in May and if the economy continues to come in hot – like it did in Q4 – there could be further rate hikes needed,” he said.

Rate warning

RBA governor Michele Bullock used a speech at the AFR Business Summit on Tuesday to warn households not to rule out a March interest rate hike.

“I am not making a prediction about March, but it will be a live meeting,” she said.

“We have inflation at 3.8 per cent headline and we have unemployment at 4.1 per cent tight.

“The board will be actively looking at whether it needs to move more quickly, so I would be discouraging people from thinking that we necessarily only move every quarter.”

NED-6209-Wage-growth-vs-inflation

Headline inflation was 3.8 per cent in the year to January and it will continue to be boosted for a time by the unwinding of electricity rebates.

Meanwhile, the all-important trimmed mean inflation rate, which strips out volatile items such as energy costs and fuel, came in at 3.4 per cent.

Both of these figures are above the RBA’s target band of a 2 to 3 per cent inflation rate.

Ms Bullock also used her prepared remarks to defend the February interest rate hike, calling it the least worst option for households over the long term.

“The danger we faced was that leaving interest rates unchanged would risk having inflation above target for longer, ultimately requiring a more aggressive tightening later and a more costly adjustment in the labour market,” she said