The Reserve Bank of Australia has lifted the cash rate by 25 basis points to 3.85 per cent, marking the first increase since November 2023 and signalling renewed concern about inflation pressures building across the economy.
The decision followed a stronger-than-expected inflation outcome of 3.8 per cent for the year to December and an unemployment rate that has edged down to 4.1 per cent. For households, the move adds roughly $80 a month to repayments on a $500,000 mortgage.
In its statement, the RBA said inflation had picked up “materially in the second half of 2025” and warned that price growth was likely to remain above target for some time. The Board pointed to stronger private demand, a housing market that continues to firm, and labour market conditions that remain “a little tight”.
“While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” the Board said. It added that growth in private demand had “strengthened substantially more than expected, driven by both household spending and investment”, while activity and prices in the housing market were “continuing to pick up”.
The Board also noted that financial conditions had eased through 2025 and questioned whether they were still restrictive, with credit “readily available to both households and businesses”. It said the effects of earlier rate reductions had yet to flow fully through to demand, prices and wages.
For households, the move adds roughly $80 a month to repayments on a $500,000 mortgage
Labour market signals remained central to the decision. The Board said unemployment had been “a little lower than expected”, underutilisation remained low, and while the Wage Price Index had eased from its peak, broader wage measures and unit labour costs were still high.
Against that backdrop, the Board concluded that “inflationary pressures picked up materially in the second half of 2025” and that it was appropriate to tighten policy further. The decision was unanimous.
Treasurer Jim Chalmers said the rate rise would be difficult for many households but stressed that the pressures identified by the RBA were coming from private demand rather than government spending.
“This will be difficult news for millions of Australians with a mortgage and we understand the pressure that this will put on families and businesses,” he said. “While today’s decision was widely expected, that doesn’t make it any easier.”
Chalmers pointed to budget repair and cost-of-living measures as key offsets, noting that the mid-year update showed the budget was “more than $233 billion better than we inherited” and that more than $114 billion in savings had been found since the government came to office.
He also highlighted the central bank’s own assessment of demand. “The Board’s statement today does not mention government spending. It makes it very clear the pressure on inflation is coming from private demand,” he said. Quoting the Statement on Monetary Policy, Chalmers added: “The near-term upward revision is driven by private demand,” and the “contribution of public demand to year-ended GDP growth has continued to ease in recent quarters, as expected.”
Treasurer Jim Chalmers said the rate rise would be difficult for many households but stressed that the pressures identified by the RBA were coming from private demand rather than government spending
Outside the official commentary, economist and former prime ministerial adviser Stephen Koukoulas said the new forecasts amounted to a sharp reset of the outlook for growth and investment.
“There’s a massive recasting of the Australian economy in the RBA forecasts,” Koukoulas said. “GDP growth of 1.6% is needed to get wages growth to 3% and inflation to 2.5%.”
He described the outlook for housing construction as bleak and business investment as subdued. “It is very gloomy on dwelling investment (no surprise given the crushing effect of interest rates) & luke warm at best on CAPEX,” he said.
Koukoulas also questioned the scale of the tightening, arguing that policy settings were already restrictive by historical standards. “The hike in the cash rate to 3.85% has interest rate settings at a level rarely seen in Australia over the past 13+ years,” he said, noting that there had been “less than 2 years since 2012 when the cash rate has been higher”.
“Clearly, for the RBA annual GDP growth of 2.1% is too strong; private sector wages growth at a 3 year low of 3.2% is too fast & government / administered price changes need to be offset by hammering the economy,” he said.
The central bank said it would remain attentive to incoming data and global developments as it assesses the outlook, reaffirming its focus on price stability and full employment as households and businesses adjust to a higher cost of borrowing.
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