The Reserve Bank of Australia (RBA) has raised the cash rate by 25 percentage points to 3.85 percent – the first increase in more than two years – citing inflation which has risen ‘materially’ since mid-2025.
This move was tipped by many economists and expected by the financial markets, after inflation rose again above the central bank’s target range of 2 to 3 percent.
Treasurer Jim Chalmers said the decision was widely expected, but it didn’t make it any easier for homeowners.
“This will be difficult news for millions of Australians with mortgages, and we understand the pressure this will put on families and businesses,” he said on Tuesday.
The RBA’s monetary policy statement released on Tuesday said: “While some of the increase in inflation is believed to reflect temporary factors, it is clear that private demand is growing faster than expected, capacity pressures are greater than previously thought and labor market conditions are somewhat tight.”
“The board assessed that inflation was likely to remain above target for some time and that it was appropriate to increase the target for the cash rate.”
RBA Governor Michele Bullock said these developments informed the board’s decision, pointing to four key factors driving the increase:
Demand stronger than expected
“Our updated view, based on the latest data, is that demand was stronger than expected in the second half of 2025, and we believe some of that strength has continued into 2026,” Bullock said.
“Labor market conditions have held up well and unemployment has remained lower than expected,” she added.
Supply restrictions have been tightened
“The economy is closer to its supply capacity than we previously thought, which means supply constraints are binding in even more sectors,” Bullock said.
“It doesn’t take much demand to generate price pressure,” she added.
“Years of weak to no productivity growth are a big part of that story,” she said.
Global economy more resilient
Third, Bullock said the global economy has proven to be “much more resilient than we thought,” despite “continuing high levels of uncertainty and unpredictability.”
She noted that this resilience had affected domestic conditions, strengthening demand and price pressures.
‘Uncertain’ whether financial conditions are restrictive
“Financial conditions have eased and it is now uncertain whether they will remain restrictive overall,” Bullock said.
“The recent rise in inflation and credit growth is enough to make us doubt this,” she added.
These four factors together led the board to deem it necessary to increase the cash rate, Bullock concluded.
The ‘big four’ banks have matched the increase, meaning a monthly increase of more than $90 on a $600,000 mortgage.
On Tuesday evening, the Commonwealth Bank, NAB, ANZ and Westpac announced they would increase the variable interest rate on their home loans by 0.25 percent. Commonwealth, NAB and ANZ’s increases will come into effect on February 13, while Westpac’s will come into effect on February 17.
Will there be more walks?
ANZ’s head of Australian economics Adam Boyton said with the RBA expecting higher inflation, lower GDP growth, higher unemployment over the medium term and a higher assumed interest rate path than previously thought, an additional rate hike appears likely.
NAB chief economist Sally Auld said that given increasing pressure on inflation, it was unlikely to be a “one-and-done” scenario for the RBA.
“We continue to forecast a follow-on increase of 25 bps in May, although risks are limited to an earlier increase and the possibility of more than just a modest 50 bp recalibration,” she said.
The RBA board said it would use upcoming data on the global economy, domestic demand, inflation and the labor market to guide future decisions.
Speaking to reporters on Tuesday, Bullock addressed the impact on households.
“For mortgage holders, this is not a great outcome,” she said. “But what is also not good for them, or for anyone else, is if inflation remains high,” she added.
‘Ultimately it is best if we get inflation under control, and our tool is interest rates.
“I sympathize with them, but the alternative is potentially even more difficult.”
– With additional reporting by the Australian Associated Press.
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