The Reserve Bank of Australia has raised the cash rate to 3.85%, citing stronger-than-expected demand and persistent inflationary pressures. The move, announced earlier this week, marks a shift in the RBA’s outlook after previously anticipating inflation would return to its 2–3 per cent target range this year.
Inflationary Pressures Broaden
While inflation peaked in 2022, it unexpectedly picked up in the second half of 2025, reaching 3.6% over the year to December 2025. This increase wasn’t limited to volatile sectors. it was observed across services, retail goods and even the cost of new home construction. Underlying inflation, which strips out volatile items, rose to 3.4% over the same period. This broadening of inflationary pressures is a key driver behind the RBA’s decision.
Governor Michele Bullock explained to the Committee that much of the recent increase in inflation is judged to be temporary, but acknowledged a concerning degree of persistence. The RBA now projects inflation won’t return to the target band until mid-2026 – a delay compared to previous forecasts.
Shifting Economic Landscape
Several factors underpin this revised outlook. Financial conditions have eased, potentially counteracting the restrictive effect of previous monetary policy. The global economy has proven more resilient than anticipated, particularly due to the strength of AI investment in key Asian economies that supply critical components. Private demand within Australia has strengthened, driven by both household consumption and business investment.
The RBA’s assessment is that aggregate demand is now outpacing the economy’s ability to supply goods and services, creating excess demand. This is compounded by a tight labour market, where firms continue to report difficulty finding skilled workers. The unemployment rate remains low, averaging 4.2% in the December quarter, with a near-record share of the population employed – 1.7 million more Australians are in work since the start of the pandemic.
Monetary Policy Response and Risks
The RBA’s decision to raise the cash rate reflects its judgment that monetary policy needs to be tighter to dampen demand and restore balance to the economy. However, the RBA acknowledges significant uncertainties remain. A key risk is whether the recent surge in inflation proves temporary or persistent. If demand continues to outstrip supply, further tightening may be necessary.
Governor Bullock emphasized the Board will be closely monitoring incoming data to assess the extent of capacity constraints in the economy. Weaker demand or stronger supply growth could lead to a quicker return to the inflation target. Elevated geopolitical and trade risks also pose a threat to the global economic outlook.
Payments System Modernization
Beyond monetary policy, the RBA is actively working to modernize Australia’s payments system. A review of surcharging and merchant card payment costs is nearing completion, with conclusions expected by the end of March 2026. This follows extensive consultation with stakeholders, including over 170 written submissions and more than 100 bilateral meetings.
The RBA is also preparing to consult on prioritizing issues under the amended Payment Systems (Regulation) Act 1998, which expands its regulatory remit to include mobile wallets and ‘buy-now, pay-later’ providers. This work is running in parallel with a parliamentary inquiry into schemes, digital wallets, and innovation in the payments sector.
The RBA is also focused on improving the resilience of its core settlement infrastructure, the Reserve Bank Information and Transfer System (RITS), and exploring how digital money can support tokenized asset markets.
Operational Incident and Cash Distribution
The RBA acknowledged a recent system issue on , which disrupted payment and property settlement services. While services were restored, a second issue caused further delays. A full review of the incident is underway and will be published before the end of February, reinforcing the importance of operational stability.
The RBA also addressed challenges in the cash distribution system, particularly in rural and regional areas. Linfox Armaguard, the primary provider of cash-in-transit services, is working with banks to develop a more sustainable pricing model. The RBA is working with industry to ensure cash remains a viable payment option for Australians who prefer it, and is collaborating with the ACCC and other agencies to support the long-term availability of cash.
Implementing the RBA Review
The RBA is actively implementing recommendations from the 2023 Review of the RBA, which aimed to enhance its effectiveness. The review focused on monetary policy, governance, transparency, and culture. Legislative changes, including the creation of a separate Governance Board, came into effect in March 2025.
The RBA now operates under three boards: the Governance Board, the Monetary Policy Board, and the Payments System Board. The Governance Board is accountable for the RBA’s operations, strategy, risk management, and budget. 41 of the 51 recommendations from the review have been addressed, with plans in place to implement the remaining recommendations in 2026 and ongoing commitments to continuous improvement.
Governor Bullock concluded by emphasizing the RBA’s commitment to building a central bank fit for the future, embracing a mindset of continuous improvement and adapting to the evolving economic landscape.
