You’ve probably heard talk about the Reserve Bank of Australia choosing to increase the cash rate at the beginning of February. This particular decision made headlines as most of 2025 suggested that we were moving towards a series of cash rate cuts. However, we’ve now moved into a rate hike environment – and it’s unlikely that this will be the last one. Many experts are suggesting there will be even more hikes as 2026 continues.

But what exactly does increasing the cash rate mean for us as individuals? It’s tempting to think that if you don’t have a mortgage, cash rate changes don’t affect you. It couldn’t be further from the truth. Here’s what you need to know about the cash rate increases and how they can impact you.

The Australian exchange rate could get stronger

When the cash rate increases, it often strengthens the value of the Australian dollar.

A higher cash rate means a better payout on Government bonds, they become much more enticing as an investment. International companies and international individuals will often buy more Australian bonds, which they have to purchase in Australian dollars. This extra demand drives up the conversion of our currency.

Obviously this isn’t always the case. When the cash rate increased during 2022 and 2023, the exchange rate stagnated due to a variety of other economic pressures. But generally, a rising cash rate means a stronger Australian dollar.

Mortgages get more expensive

The key impact of increasing the cash rate is that loans and any money borrowed with a lending provider becomes more expensive to pay back. Mostly, this impacts mortgages.

Most car loans and personal loans have a fixed interest rate; meaning the interest you pay on this loan doesn’t change. While you can get fixed interest loans for mortgages, the fixed interest period is usually only temporary meaning that a very large portion of mortgages have a variable interest rate. This means that the interest rate you pay goes up and down to match patterns of the cash rate.

When the cash rate increases, the monthly repayments on mortgages will increase. For the average mortgage, the payments will increase by roughly $100 a month. 35 per cent of Australians have a mortgage, 32 percent own their home with no mortgage, 31 percent rent, and 2 per cent live in a property they neither own or pay rent on (eg living rent-free in a property your parents or family own).

Inflation increases at a slower rate

Inflation very rarely goes down or “deflates”. Instead, “lowering inflation” is about trying to have inflation increase by a lower rate. For example, it’s currently increasing by roughly 4 per cent a year, but the RBA wants it to increase by 2 per cent a year. It’s still increasing, but just by a smaller amount.

Increasing the cash rate is supposed to decrease the rate of inflation by making money more expensive to borrow. When the cash rate is increased, people and institutions take out few loans, and anyone with an existing loan has to pay more to service it. This means people and institutions have less money to spend, and businesses theoretically have to lower their prices to entice customers.

Unfortunately, the economy is not as simple as it used to be in Australia – and inflation is very sticky in the Australian economy. There are fewer people with loans than there were in the past, so the pressure of rising mortgages isn’t as broadly effective. Also, Australia has a monopolised market in many areas; consumers often don’t have a choice to move to a cheaper alternative, thus there is no pressure or incentive for the expensive brands to drop prices. You can see this in supermarkets where Coles and Woolworths control 67 per cent of the market. Or even in insurance where just four parent companies control 75 per cent of supply. All of these factors mean that increasing the cash rate to control inflation is not as effective as it once was.

Yes, increasing the cash rate is lauded as a blunt and unfairly applied tool. But it is the only one that the RBA has. It was former governor of the RBA Phillip Lowe who called inflation a tax on the poor. It erodes the value of the money you earn. So, it is extremely important to the RBA to do what they can to control runaway inflation and temper sentiment in any way that they can.

Rents and housing can get more expensive

One of the desired outcomes of increasing the cash rate is to reduce the cost of housing. However, due to the nature of Australia’s housing market, it often has the opposite effect.

When mortgages get more expensive, investors could choose to put the rents up on their rental properties to cover the cost of the increased payments. It also discourages other “mum and dad” investors, who provide the rental supply, from getting into the housing market. An increased cash rate means that the share of investors swings more towards corporations, developers or the 1 per cent – groups that are less likely to rent the property and more likely to keep it empty.

Additionally, cash rate increases have the effect of slowing down construction and the building of new properties. It means that we don’t meet the increased demand for housing, and both the buying and rental market tightens. This means that house prices and rents get even more expensive than they already are.

Government assistance and Government initiatives can be cut

It’s not just mortgages that get more expensive to pay off, any loan with a variable interest rate is more expensive. And any new loans become more expensive to take out in the first place. The biggest holder of loans in Australia? It’s of course the Federal Government.

You probably hear people talking about “Government spending” or pejoratively “excessive Government spending”. “Government spending” is simply the social services and physical and digital infrastructure the Government provides. Rental assistance? Government spending. Medicare rebates? MyGov app? Government spending.

When the amount the Government “spends” exceeds the amount it gets in taxes, then it has to borrow the money or go into a “deficit”. When the cash rate increases, all the interest rates on the Government’s loans increase too. It means that the Government may have to pull back on social services, building new facilities, funding new programs and more as it can no longer afford it all. Or it can raise taxes to generate more money.