The decision comes at a critical time for the economy, with investor lending growing at its fastest pace in over a decade and property prices hitting record highs. A growing number of economists now argue that by maintaining its current policy settings, the RBA may be fuelling the very inflation it seeks to contain.
Real Interest Rate Nears Zero, Prompting Increased Risk-Taking
The issue lies in the widening gap between the RBA’s official cash rate and the country’s inflation rate, which has led to a steep decline in what economists call the real interest rate. According to Fortlake Asset Management’s Christian Baylis, the real rate is now “close to zero,” effectively reducing the cost of borrowing despite no formal rate cut.
Baylis notes that by not adjusting interest rates in response to persistent inflation, the RBA has “implicitly, through inertia, allowed another interest rate cut into the economy by not moving the interest rate lever,” This dynamic means that while the headline cash rate remains unchanged, the inflation-adjusted cost of borrowing is falling, incentivising more debt-fuelled investment.
This is already visible in credit markets. Investor loans are rising at a pace not seen in ten years, while regulators have begun warning banks to tighten lending standards. UBS Australia highlighted that private sector credit has reached a new cycle high, with the nation’s debt-to-income ratio climbing back towards record levels.
Real estate is a particular area of concern. House prices are rising at nearly 7% annually, a rate that UBS says is fuelling a new credit cycle. The combination of high inflation, low productivity, and strong wage growth may continue to suppress the real interest rate, and in doing so, may deepen the housing affordability crisis.
Impact on Savers, Investors, and Policy Credibility
A low or negative real interest rate doesn’t affect all participants equally. Borrowers benefit from cheaper debt, but savers see their real returns eroded. “When real interest rate falls, that’s good news for the borrowers and not good news for the savers because their real return is declining,” said Lochlan Halloway, equity strategist at Morningstar. He added that falling real rates boost the present value of future income-generating assets, such as property and shares, encouraging more risk-taking.
This appetite for risk is now evident in equity markets, where valuations are rising despite economic uncertainty. Economists like George Tharenou at UBS have flagged “bubble-like characteristics” across a number of asset classes, including Australian equities.
For RBA Governor Michele Bullock, the central question is whether to tolerate a low real interest rate or resume monetary tightening, a decision complicated by soft productivity figures and still-elevated inflation.
The bond market’s shift in expectations reflects this uncertainty. Just weeks ago, traders had priced in a potential rate cut by February 2026. That timeline has now been pushed back to May 2026. Analysts are increasingly sceptical that the RBA can afford to wait much longer.
Should inflation persist, the bank may be forced into action despite broader concerns about the cost of living and mortgage stress. As Baylis puts it, “If we get further confirmation that those inflation numbers are here to stay… it would probably need to raise rates.”
