The Reserve Bank of Australia (RBA) has announced a 25 basis point increase in the cash rate, pushing it to 3.85 percent. This marks the first rate hike in over two years, driven by inflation that has significantly escalated since mid-2025.

Many economists had anticipated this move, aligning with financial market expectations, as inflation rose beyond the RBA’s target range of 2–3 percent.

Treasurer Jim Chalmers acknowledged that while the rate hike was widely predicted, it nonetheless poses challenges for homeowners.

“This is tough news for millions of Australians with mortgages, and we recognize the strain this will place on families and businesses,” Chalmers stated on Tuesday.

In its Monetary Policy Statement released on Tuesday, the RBA noted: “Although part of the inflation rise is attributed to temporary factors, it’s clear that private demand is growing faster than anticipated, capacity pressures are more acute than previously assessed, and the labor market is somewhat tight.”

“The board determined that inflation is likely to stay above the target for some time, necessitating an increase in the cash rate target,” the statement concluded.

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 matched the increase, which will mean 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 be increasing their home loan variable interest rates by 0.25 per cent. Commonwealth, NAB and ANZ’s increases will come into effect on 13 February, while Westpac’s will come into effect on 17 February.

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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