The Reserve Bank of Australia (RBA) has lifted interest rates for the first time since November 2023, delivering a widely anticipated 25 basis point increase following its first policy meeting of the year.
The move takes the official cash rate from 3.6% to 3.85% and is expected to add about $100 a month to repayments on a $600,000 mortgage.
The decision follows a stronger-than-expected inflation outcome, with headline inflation running at 3.8% for the 12 months to December, alongside a resilient labour market that has seen unemployment fall to 4.1%.
“The Board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures.
“While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little 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.”
Inflation and jobs back in focus
The rate rise comes as the central bank responds to signs that inflationary pressures remain elevated, despite earlier easing measures. Both headline inflation and the RBA’s preferred trimmed mean measure remain above the bank’s forecast and target range, prompting a reversal after three rate cuts during 2025.
RBA governor Michele Bullock has previously warned that persistent inflation could require tighter policy settings, with internal modelling suggesting a 0.5 percentage point rate shock could reduce GDP by around 0.4% within a year, equivalent to roughly $10 billion in economic output.
Political debate on spending
The decision also lands amid debate over the role of government spending in fuelling inflation. Treasurer Jim Chalmers has rejected claims that fiscal policy has contributed to rising prices, describing such commentary as politically motivated.
“I see that commentary often, that commentary is more motivated by politics than it is founded in facts. If you look at the most recent tick up in the most recent CPI data, for example, the big driver of that was holiday spending,” Dr Chalmers told Sky News.
“There’s never a unanimous view amongst economists … But I listen respectfully to a whole range, the whole gamut, the whole spectrum of economic views, and I try to read as much of the economic commentary that I can.”
Prime Minister Anthony Albanese also sought to deflect criticism of the government’s economic management ahead of the decision, saying Labor inherited high inflation and rising rates when it came to office.
“We, of course, inherited an inflation rate with the six in front of it, and rising interest rates began to rise before we came into office,” Albanese said on Tuesday.
“We’ve been very focused on helping people and making a difference.”
VanEck: market may be underpricing further moves
Following the RBA’s announcement, VanEck Head of Investments & Capital Markets Russel Chesler said the central bank had little choice but to act, given the strength of recent economic data.
“The economy is running hot and the RBA had no real choice but to pull the trigger today, lifting the cash rate by 25 basis points to 3.85%. While the move was widely expected, it marks a clear escalation in the fight against inflation. With annual inflation still running at 3.8% as at December 2025, the RBA is a long way from declaring victory, and one rate rise alone is unlikely to do the job,” said Chesler.
“What makes this decision more consequential is that the economy is showing few signs of cooling. Unemployment remains low at 4.1%, household spending is holding up, and property prices continue to climb. Yesterday’s ANZ-Indeed Job Ads data showed ads jumping 4.4% month-on-month in January, the strongest increase since early 2022, signalling renewed momentum in the labour market rather than the slowdown the RBA would be hoping for.
“On top of that, home prices are continuing to march higher, rising 0.8% in January according to Cotality, up from 0.6% in December. Add elevated electricity costs, higher global tariffs and stubborn services inflation, and the risk is that inflation becomes entrenched. In that environment, the market’s expectation of just one more rate rise later this year may prove too optimistic, with the next move potentially coming sooner, and possibly more than once.
“For investors, this is not a benign backdrop. Higher rates and a resilient economy tend to favour cyclical areas of the market. We expect resources, industrials, mid and small cap stocks to benefit from ongoing economic momentum and firm household demand, particularly companies with inflation-linked revenues and pricing power,” Chesler said.
Analysts warn RBA hike may add pressure without fixing inflation
Graham Cooke, Finder’s head of consumer research, said the RBA’s move sent a clear signal the inflation “genie” had not been put back in the bottle.
“Our research showed mortgage stress on average had started to subside – expect it to rise with a vengeance as monthly payments jump,” he said.
“If inflation persists, expect more of last year’s mortgage stress relief to be wiped away.”
LJ Hooker Group chief executive Mathew Tiller said a combination of inflation and labour market strength had likely driven the RBA’s decision.
“Inflation has lifted again, CPI is 3.8% over the year to December, the trimmed mean is 3.3% and unemployment is still just 4.1%, so the RBA may feel it needs to stay on the front foot,” Tiller said.
“For the housing market, a hike should cool momentum rather than turn it. Demand remains supported by jobs, population growth and active investors, while listings remain tight, so we may see decision time slow and price growth moderate, not a broad pullback.”
Not all economists agreed the increase was necessary, warning it risked adding to cost-of-living pressures without addressing the main sources of inflation.
Housing Industry Association chief economist Tim Reardon argued higher rates would do little to tackle inflation drivers and could worsen housing supply constraints.
“There is an irony at play at the moment, that the main driver of inflation is a shortage of housing and higher interest rates will make this shortage worse,” Reardon said.
“The housing shortage is now a macroeconomic challenge and it cannot be fixed with higher rates.”
AMP chief economist Shane Oliver said the call had been finely balanced, noting mixed signals in the inflation data.
“The February meeting was a very close call,” Dr Oliver said. “December inflation came in above target and was higher than expected, which may have justified a hike, but the trend in underlying inflation has been easing in recent months.
“On balance, we think the RBA should have held and waited for more information, as a premature hike could snuff out the recovery in consumer spending.”