RBA Hikes Rates and Flags 1990s Recession Risk for Borrowers

The Reserve Bank raised the cash rate this month while warning unanchored inflation expectations could force a deeper 1990s-style economic slowdown.

The RBA's Rate Decision and Its Warning to Borrowers

The Reserve Bank of Australia raised the cash rate this month, and the reasoning behind that decision should concern every Australian with a home loan. Speaking at a Bloomberg investment gathering in Sydney on Tuesday, RBA assistant governor and chief economist Sarah Hunter laid out why the central bank is increasingly worried about what comes next — and why a reference to the 1990s recession has entered the official conversation.

As [ABC News reports](https://www.abc.net.au/news/2026-05-19/reserve-bank-sarah-hunter-mentions-recession-inflation/106695446), Dr Hunter told the gathering that "inflation expectations" — the beliefs businesses and consumers hold about future price rises — are showing early signs of becoming unanchored. When people expect prices to keep rising, they buy now rather than later, businesses lift prices pre-emptively, and workers demand higher wages. The result is a self-reinforcing inflation spiral that is far harder to break than ordinary price pressure.

Australia's latest official figures show headline inflation running at 4.6 per cent for the 12 months to February 2026. The trimmed mean — the Reserve Bank's preferred measure of underlying or core inflation — was 3.3 per cent over the same period. Both figures sit well above the RBA's bullseye target of 2.5 per cent, and Dr Hunter made clear the central bank is not about to declare victory yet.

The Oil Shock Driving the Risk

The primary driver of the RBA's current anxiety is the ongoing conflict in the Middle East and the oil price shock it has created. ABC News reports that Dr Hunter told the Bloomberg gathering that fuel surcharges raised by firms at the start of supply chains are flowing into a broad set of industries. Some construction firms — already heavily exposed to transport and oil-derived raw materials — are reviewing prices for new contracts, particularly in regions where demand remains strong and supply capacity is constrained.

This matters for mortgage holders in a few ways. If fuel costs persistently drive up the price of building materials and construction, the cost of building a home rises alongside it, compounding housing affordability pressure. More immediately, if those cost increases are passed through to consumers broadly, inflation will remain stubbornly above target for longer — putting further upward pressure on interest rates.

The board's published minutes, released on Tuesday, confirm members are watching global bond yields, which have risen particularly at longer maturities. Rising long-dated bond yields globally signal that financial markets are pricing in a higher-for-longer interest rate environment across many advanced economies — not just Australia.

What Would Happen If Inflation Expectations Became Entrenched?

Dr Hunter's most striking remarks were her explicit reference to the early 1990s recession. "Doing so may require a more substantial slowing of economic activity, as we saw during the early 1990s recession," she said, describing what would happen if inflation expectations became entrenched and the RBA had to hike rates aggressively to bring them under control.

That's a sobering reference point. The early 1990s recession saw unemployment hit double digits and property values fall sharply in many markets. Dr Hunter was clear this is a risk scenario — not a forecast — and one the central bank is actively working to prevent by keeping expectations anchored now.

Westpac's latest consumer sentiment survey, cited in ABC News's reporting, showed confidence rose 3.5 per cent in May, partly reversing April's sharp decline. The improvement was driven by a fall in fuel spending, linked to the halving of the fuel excise and some easing in global oil prices. The survey's "time to buy a dwelling" index nonetheless fell 16.1 per cent in May to 72 per cent — its lowest reading since late 2024. The signal from buyers is clear: elevated mortgage rates and cost-of-living pressures remain a significant brake on housing activity.

Generationally, the federal budget landed very differently across age groups. Westpac economist Matthew Hassan noted that among baby boomers and Generation X, those expecting to be worse off from the budget outnumbered those expecting to benefit by 30 to 36 percentage points, compared with a gap of just 9 percentage points for millennials and a slight net positive spread for Generation Z.

The RBA has flagged it will closely monitor the housing market in the months ahead, particularly as it digests the impact of the budget's tax changes on assets and how they flow through into household wealth and consumer spending.

What Borrowers Should Do Right Now

The clear message from this week's RBA activity: do not assume rates are heading lower anytime soon. The central bank raised rates this month, inflation remains well above target, and the risks are tilted toward keeping rates higher for longer. That makes proactive mortgage management more important than ever.

If you're currently on a variable rate, now is the time to check whether your rate is still competitive among [today's home loan options](/home-loans/cheapest). Lenders are still competing hard for refinances, and even a modest rate reduction can meaningfully cut your monthly repayments. Run the numbers on your own loan with our [refinance savings calculator](/calculators/refinance-savings).

If you're approaching the end of a fixed-rate term and haven't yet compared what the market is offering, act before your lender automatically rolls you onto their standard variable rate. Our [refinancing guide](/home-loans/refinance) walks through what to look for and how to compare.

Planning to buy? Use our [borrowing power calculator](/calculators/borrowing-power) to understand exactly how the current rate environment affects what you can borrow before you start making offers. The RBA is navigating one of its most challenging policy environments in decades. Staying informed and proactive about your mortgage is the best hedge available to ordinary borrowers.