RBA raises cash rate to 3.85 percent on inflation concerns
The Reserve Bank of Australia has increased the cash rate target by 25 basis points to 3.85 percent. The Monetary Policy Board decided unanimously at its meeting today, citing a material pick-up in inflation in the second half of 2025.
Inflationary pressures resurface
The Board's decision to raise the cash rate follows a material pick-up in inflation during the second half of 2025, despite a substantial fall from its 2022 peak.
The RBA noted that some of this increase reflects greater capacity pressures within the economy.
Private demand has strengthened more than anticipated, driven by both household spending and investment, contributing to these pressures.
Activity and prices in the housing market are also continuing to pick up, adding to the inflationary environment.
Consequently, the Board judges that inflation is likely to remain above its target for some time, necessitating today's policy adjustment to ensure price stability.
Tight labor market and easing financial conditions
Labour market conditions remain tight, with the unemployment rate slightly lower than expected and underutilisation measures at low rates, reflecting recent economic activity momentum.
Wage Price Index growth has eased, but broader measures of wages growth remain strong, and unit labour costs are high.
Financial conditions eased over 2025, and their restrictive nature is uncertain.
Credit is readily available, with earlier rate reductions yet to fully impact aggregate demand, prices, and wages.
Recently, the exchange rate, money market interest rates, and government bond yields have risen, following increased market expectations for the cash rate.
A necessary, albeit late, adjustment
This rate hike confirms the RBA's renewed focus on price stability, acknowledging that inflation pressures are more entrenched than previously thought.
While addressing strong demand and capacity constraints, the timing suggests a reactive rather than proactive policy adjustment.
This implies continued uncertainty for the economy, despite the Board's commitment to data-dependent decisions.