RBA raises cash rate to 3.85 percent amid persistent inflation
The Reserve Bank of Australia has increased the cash rate target by 25 basis points to 3.85 percent. Governor Bullock cited stronger-than-expected demand and persistent inflation pressures in her statement to the House of Representatives Standing Committee on Economics.
Inflation's stubborn return prompts rate hike
The Reserve Bank of Australia's Monetary Policy Board recently increased the cash rate target by 25 basis points to 3.85 percent.
This decision follows a significant pick-up in inflation during the second half of 2025, which was materially higher than earlier anticipated.
Underlying (trimmed mean) inflation rose to 3.4 percent over the year to the December quarter 2025, while headline inflation reached 3.6 percent.
This broad-based increase was observed across services, retail goods, and new home building costs.
Despite inflation falling substantially from its 2022 peak, the RBA now forecasts it will not return to the 2–3 percent target band until mid-2027. Labour market conditions remain tight, with the unemployment rate averaging 4.2 percent in the December quarter, indicating a robust employment environment that contributes to demand pressures.
Global resilience and domestic demand shift outlook
The RBA's revised economic outlook is shaped by several factors.
Financial conditions have eased, and credit growth has picked up.
The global economy proved more resilient than expected, with stronger growth in major trading partners, partly due to the AI investment boom.
Domestically, private demand, driven by household consumption and business investment, increased more strongly in late 2025 than anticipated.
This, combined with a tight labor market, indicates more excess demand.
The Board judged that tighter monetary policy was needed to dampen aggregate demand and rebalance the economy, unless supply capacity expands quicker.
Risks include the persistence of inflation and global uncertainties.
A necessary, albeit challenging, adjustment
The recent cash rate increase, while difficult for mortgage holders, is a necessary step for long-term economic stability.
High inflation harms all Australians, especially those with lower incomes, by eroding purchasing power.
This decision reaffirms the RBA's commitment to its price stability mandate amidst complex economic pressures.