Sydney, Australia – The Reserve Bank of Australia (RBA) today, , increased the cash rate target by 25 basis points to 3.85 percent. The decision, reached unanimously by the Board, comes amid concerns that inflationary pressures, while having fallen from their 2022 peak, have recently begun to reassert themselves.
The RBA’s move reflects a judgment that inflation is likely to remain above target for some time, despite substantial easing throughout 2025. The Board cited strengthening private demand, greater capacity pressures and tight labour market conditions as key factors influencing its decision. According to the RBA, growth in private demand has “strengthened substantially more than expected,” driven by both household spending and investment.
The decision follows a period of fluctuating expectations. In December 2025, two of Australia’s major banks began forecasting a February rate hike, while others, including Westpac, maintained a hold forecast. Recent data showing the annual inflation rate reaching 3.8% in December 2025 – exceeding expectations of 3.6% and November’s 3.4% – further solidified expectations of a rate increase. Housing costs were identified as a significant contributor to the higher-than-anticipated inflation figure, rising by 5.5% annually.
The RBA acknowledged that financial conditions eased over 2025, creating some uncertainty about the overall restrictiveness of monetary policy. While credit remains readily available to both households and businesses, and the full effects of earlier rate reductions have yet to be fully realized, more recent movements in the exchange rate, money market interest rates, and government bond yields suggest a shift in market expectations regarding future cash rate adjustments.
Labour market conditions also played a role in the Board’s decision. The unemployment rate has remained lower than expected, and measures of labour underutilisation remain at low levels. While wage price index growth has eased from its peak, broader measures of wages growth continue to be strong, contributing to high unit labour costs.
The RBA statement highlighted uncertainties surrounding the domestic economic outlook and the extent to which monetary policy is currently restrictive. The Board noted that stronger-than-expected growth in demand, coupled with limited growth in the economy’s supply capacity, could exacerbate capacity pressures. However, the global economic outlook remains uncertain, though it has not yet had a significant depressing effect on the Australian economy, with growth and trade in major trading partners exceeding expectations.
The Board emphasized that a wide range of data confirmed a material pick-up in inflationary pressures during the second half of 2025. While acknowledging that some of this increase may be attributable to temporary factors, the Board concluded that the acceleration in private demand, increased capacity pressures, and tight labour market conditions warranted an increase in the cash rate.
Looking ahead, the RBA stated it will remain attentive to incoming data and its evolving assessment of the outlook and risks to guide future decisions. This will include close monitoring of developments in the global economy and financial markets, trends in domestic demand, and the outlook for both inflation and the labour market. The Board reiterated its commitment to achieving price stability and full employment, and its willingness to take whatever action it deems necessary to achieve those goals.
Earlier in 2025, the RBA had begun easing policy, lowering the cash rate to 3.85% by May. This earlier easing was predicated on increasing confidence that inflation was on track to return to the target range. However, the recent resurgence in inflationary pressures has prompted a reversal of that trend.
The decision to raise rates comes after a period where the RBA held the cash rate steady at 3.60% at its final meeting of 2025. The current increase signals a renewed focus on curbing inflation, even as the central bank acknowledges the potential for economic headwinds.
