Australia’s key interest rate is set to reach its highest level since 2011, which is expected to reduce house prices and increase monthly mortgage repayments by over $100. The Reserve Bank of Australia (RBA) is anticipated to raise the cash rate from 4.35% to 4.6% on Tuesday. This would mark the fourth increase in 2026 and push typical home loan interest rates to 6.5%. For someone with an average-sized new mortgage of $731,000, currently paying 6.2%, this increase would add about $119 to their monthly $4,477 repayments. Since January, the total increase in repayments would be nearly $480. The share of borrowers falling behind on their home loan repayments is small but growing, according to S&P data analyzed by Westpac. Household budgets have also been affected by rising petrol prices, which are 80c higher since the start of the year, adding $44 to the cost of filling a 55-litre vehicle tank. Consumer spending is slowing, with Commonwealth Bank data showing households reduced purchases of education, motor vehicles, and household goods in August. House prices are expected to fall further after the fourth rate increase. Comparison website Canstar estimated that the hike would reduce the borrowing capacity of someone earning an average annual full-time wage of $108,650 by $11,200, bringing the total lost borrowing power to $47,400. Shrinking borrowing capacities have made it harder for buyers to enter the market. Three rate increases and the Albanese government’s investor tax reforms have led to a drop in home loan inquiries, according to Equifax data. Inquiries have fallen from nearly 15,000 a week at the start of 2026 to just over 12,000 in August and September. House prices across Australia have dropped more than 4% from their peak earlier this year, according to Cotality data. The RBA predicted prices would fall 7.3% by mid-2027 before rising again if the bank cuts rates. Westpac forecasts a 10% drop in Sydney and an 8% drop in Melbourne, suggesting new buyers in some areas may find housing more affordable, even after higher interest rates. However, most capital cities are not expected to see significant price drops, meaning housing affordability may not improve despite higher interest rates and repayments. When the cash rate last exceeded 4.35% in 2010, inflation was 3%, housing markets were strong, and the mining boom was boosting household incomes. Rates remained above that level until the end of 2011. Nearly 15 years later, the RBA is expected to return interest rates to the same level, despite a weak economy and falling house prices, because inflation has remained above the target range of 3%. Senior RBA staff have warned that households may be starting to expect high inflation to continue beyond the disruptions to oil prices from the Middle East conflict. Shane Oliver, AMP’s chief economist, said on Saturday the central bank risks losing financial markets’ confidence if it does not raise rates again. “After more than five years of inflation being above target, threatening RBA credibility, it does not have the luxury of continuing to wait and assess,” Oliver said. Financial markets expect an additional cash rate rise early next year.