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The Reserve Bank of Australia (RBA) has raised the cash rate by 25 basis points to 3.85 percent. This marks the first increase in over two years, prompted by inflation that has significantly risen since mid-2025.
Many economists had predicted this move, which was also anticipated by financial markets, as inflation surged beyond the central bank’s target range of 2–3 percent.
Treasurer Jim Chalmers acknowledged that while the decision was expected, it still poses challenges for homeowners.
“This is tough news for millions of Australians with mortgages, and we recognize the strain it will place on families and businesses,” he remarked on Tuesday.
In its Monetary Policy Statement released Tuesday, the RBA stated: “Although some of the inflation increase is due to temporary factors, it’s clear that private demand is growing faster than anticipated, capacity constraints are more significant than previously thought, and the labor market is somewhat tight.”
“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.”
RBA governor Michele Bullock said those developments drove the board’s decision, pointing to four key factors that guided the hike:
Demand stronger than expected
“Our updated view, driven by the latest data, is that demand was stronger-than-expected over the second half of 2025, and we think some of that strength has carried into 2026,” Bullock said.
“Conditions in the labour market have held up well, and unemployment has remained lower than thought,” she added.
Supply constraints tightened
“The economy is closer to its supply capacity than we previously thought, which means supply constraints are binding in some more sectors,” Bullock said.
“It’s not taken much of a pick-up in demand to generate price pressures,” she added.
“Years of weak to no productivity growth is a big part of that story,” she said.
Global economy more resilient
Thirdly, Bullock said the global economy had turned out to be “much more resilient than we thought”, despite “the ongoing high level of uncertainty and unpredictability”.
She noted that this resilience had fed into domestic conditions, strengthening demand and price pressures.
‘Uncertain’ whether financial conditions restrictive
“Financial conditions have eased, and it’s uncertain now whether they remain restrictive overall,” Bullock said.
“The recent pick-up in inflation and credit growth are enough to make us question this,” she added.
These four factors, taken together, led the board to deem it necessary to increase the cash rate, Bullock concluded.
The ‘big four’ banks have started reacting to the increase, which will mean a monthly increase of more than $90 on a $600,000 mortgage if lenders all pass on the increase in full.
On Tuesday evening, the Commonwealth Bank, NAB and Westpac announced they would be increasing their home loan variable interest rates by 0.25 per cent. Commonwealth and NAB’s increases will come into effect on 13 February, while Westpac’s will come into effect on 17 February.
ANZ has not yet publicly announced whether it will pass on the hike in full.
Are there more hikes to come?
ANZ’s head of Australian economics Adam Boyton said that with the RBA expecting higher inflation, lower GDP growth, higher medium-term unemployment and higher assumed interest rate path than previously thought, an additional rate hike appears likely.
NAB chief economist Sally Auld said given the increasing pressures on inflation, it was unlikely to be a “one-and-done” scenario for the RBA.
“We continue to forecast a follow-up 25bp hike in May, although risks are biased to an earlier hike and the possibility of more than just a modest 50bp recalibration,” she said.
The RBA board said it would use upcoming data about the global economy, domestic demand, inflation and the labour market to guide future decisions.
When speaking to reporters on Tuesday, Bullock addressed the impact on households.
“For mortgage holders, this isn’t a great outcome,” she said. “But what’s also not great for them, or for anyone else, is if inflation remains elevated,” she added.
“Ultimately, it is best if we get inflation under control, and our instrument is the interest rate.
“I empathise with them, but the alternative is potentially even harder.”
— With additional reporting by the Australian Associated Press.
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