Interest rates are on the rise with a surprising spike in inflation and more Australians joining the workforce enough for the RBS to move on rates.
The RBA has lifted interest rates by 25 basis points following its first meeting of 2026
The official cash rate is now 3.85 per cent.
Interest rates are now back where they were in July 2025.
Tuesday’s decision was unanimous.
Australia’s Cash Rate 2022
Inflation was the key reason for the rise.“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target,” the RBA said in its statement to announce the increase.
The board also flagged that inflation would continue to be an issue – hinting more rate increases are possible.
“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,” it said.
“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.”
Before Tuesday’s announcement, money markets had placed a 70 per cent chance on an interest rate hike.
The board statement said it expected inflation to remain above its target of between 2 and 3 per cent, despite it being lower than at the beginning of the decade.
“While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” the statement said.
“The board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures.
“As a result, the board considers that inflation is likely to remain above target for some time.”
NED-9108-Monthly-Inflation-Indicator
Finder data shows a mortgage holder owing $500,000 will now need to pay an additional $79 a month or $948 a year, while those in a $1m debt will have to pay an additional $158 a month or $1895 a year should the banks pass on the rate hike.
With rates going up by 25 basis points, Roy Morgan data suggests 41,000 additional Australians mortgages are now “at risk”, with 1,228,000 mortgage holders feeling the pinch.
HSBC chief economist Paul Bloxham said interest rates needed to rise due to Australia reaching its capacity constraints.
“Inflation surge is not because growth has been particularly strong,” he said.
“Instead, it largely reflects that the supply side of the economy (the potential growth rate) is lower than it used to be.”
The Australian Bureau of Statistics on Wednesday revealed the headline inflation rate was 3.8 per cent for the 12 months until December, up from 3.4 per cent in the 12 months until November.
At the time, the jobs market was stronger than expected with the unemployment rate in December falling from 4.3 to 4.1 per cent.
Mr Bloxham said Tuesday’s announcement would hurt mortgage holders.
“We expect it to be a painful hike given that it reverses course and that the story is of a supply-constrained economy, not strong demand,” he said.
