Key takeaways
- The Reserve Bank of Australia lifted the cash rate 25 basis points to 4.85%, its highest level since late 2008, in a split 6–3 vote.
- The move came a day after Westpac reported a A$6.8 billion full-year profit, with its net interest margin down 7 basis points to 1.87%.
- Higher rates usually help bank margins, but fierce competition for loans and deposits means Westpac isn’t feeling that benefit, while borrowers face more strain.
Australia’s central bank raised interest rates to an 18-year high on Tuesday, adding fresh pressure to households and to the big banks, whose margins are already being squeezed by competition.
The Reserve Bank of Australia lifted the cash rate by 25 basis points to 4.85%, the fifth increase of 2026 and the highest level since late 2008. The decision was split, with six members of the Monetary Policy Board voting to raise rates and three preferring to hold at 4.60%.
The board said inflation is now expected to stay high through much of 2027 and is not forecast to fall below 3% until late that year, around three quarters later than previously expected. It warned that this poses upside risks to inflation expectations.
Westpac’s numbers set the scene
The hike landed a day after Westpac Banking Corporation reported a full-year net profit of A$6.8 billion for the 12 months to September 30. Cash earnings excluding one-off items came in at about A$7.0 billion, a touch ahead of the roughly A$6.96 billion analysts had expected, and the bank lifted its full-year dividend by 1% to A$1.54 per share.
The weak spot was net interest margin, the gap between what Westpac earns on loans and pays on deposits. It fell 7 basis points to 1.87%, slightly below the 1.89% the market had pencilled in.
JP Morgan analyst Andrew Triggs called the result softer than forecast, pointing to a particularly weak fourth quarter for core margins, driven by mortgage pricing in Australia and New Zealand. UBS analyst John Storey said competition for deposits and home loans had trimmed around 5 basis points from core margin and is likely to keep weighing into FY27.
Why higher rates aren’t helping
In theory, rising rates give banks room to widen margins. In practice, Australia’s lenders are fighting hard for both mortgages and deposits, and that competition is eating the benefit.
The risk now shifts to credit quality. Westpac said stressed loans as a share of tangible common equity fell to 1.17%, and its CET1 capital ratio of 12.5% sits about A$2.9 billion above target. But each hike adds to mortgage repayments at a time when Australian home values have fallen for seven straight months.
Chief executive Anthony Miller said the economy is holding up reasonably well, supported by business investment, but cautioned that rates are likely to stay elevated into 2027 and the strain is falling unevenly on households and businesses.
The forecasts are darkening
The big banks were already bracing for a slowdown before today’s decision. Commonwealth Bank has cut its growth forecast to just 1% by mid-2027 and sees unemployment rising to 5.1%. NAB expects joblessness to reach 5.4% by the end of 2027.
The RBA noted that rate changes take 12 to 18 months to flow through the economy fully, so the impact of this year’s five increases will keep building into 2028.
What to watch
Bank reporting season continues this week, with NAB due on Thursday and Macquarie on Friday, followed by ANZ on November 9. Investors will look for whether other lenders report the same margin pressure, and whether bad-debt provisions start to rise.
Why it matters
Australia offers a clear test of how big banks perform when rates keep rising but growth is cooling. Westpac shows profits can hold up, but the margin squeeze suggests the usual tailwind from higher rates is weaker than it looks. With the RBA signalling inflation will linger, the pressure on both banks and borrowers is unlikely to ease soon.
