‘Surging inflation’ forces RBA into grim rate decision

Interest rates are on the rise with a surprising spike in inflation and more Australians joining the workforce enough for the Reserve Bank 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, and the RBA hinted there may be more hikes to come.

Australia's Cash Rate 2022

Inflation was the key reason for the rise, as data and new RBA forecasts showed it remaining above its target of between 2 and 3 per cent.

“The recent run of data gives the board a clear enough view of the underlying inflation is too strong,’ RBA governor Michele Bullock told reporters after the decision.

“We have updated our assessment and outlook for the economy and conclude that the rate was no longer at the right level to get inflation back to target in a reasonable time frame.”

She said beating inflation was vital.

“Now, I know this is not the news that Australians with mortgages want to hear, but it is the right thing for the economy,” she said.

She said she realised Australian households would be disappointed, but said it was the right decision.

“I do understand that for mortgage holders, this isn’t a great outcome,”

“ … what’s also not great for them or for anyone else is if inflation remains elevated because every time they go to the shop, every time they go to buy their groceries, every time they go to get personal services, medical, if inflation is high, that’s going to keep going up.”

However, Ms Bullock would not predict if there would be more rate rises.

“So could we do a lot of rate rises and bring inflation back down very quickly? Possibly, I don’t know,” she said.

“But it might have big implications for the unemployment rate and the economy.

“The bottom line is the strategy really hasn’t changed here.

“We are still trying to bring inflation down and keep employment as strong as we can, as close to sustainable full employment as we can.”

She said other parts of the economy were doing well.

“We are actually in a really good position. The labour market is really strong and domestic demand is recovering,” Ms Bullock said.

“These are good things.

“But it’s just that we’re supply-constrained, and we think we are even a little bit more constrained than we thought a little while ago.”

In its statement to announce the increase, the RBA board said the increase “was appropriate”

“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.”

Economists expect more rate hikes

Harry Murphy Cruise, head of economic research and global trade for Oxford Economics Australia, said the increase was to be expected as inflation remained sticky.

“The fact that the decision was unanimous should tell households and businesses that the RBA isn’t going to mess around with inflation,” he said.

“The board is aligned in their view that inflation’s uptick can’t be explained away by temporary factors.”

He said the bank’s statement of monetary policy, also published on Tuesday, revealed a worrying outlook.

“The bank now expects trimmed mean inflation to return to the middle of the 2-3 per cent target band only by mid-2028 – a full year later than projected in November,” he said.

“That outlook assumes the cash rate rises to 4.2 per cent by year-end, broadly in line with market pricing and around 80 basis points higher than assumed in November.

“With the RBA now expecting a slower moderation in inflation (despite a higher rate path), the risk is clearly skewed toward a series of hikes rather than a one-off move – particularly in light of today’s unanimous decision.”

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BDO chief economist Anders Magnusson said the RBA did not reverse course easily, saying long-term inflation would be worrying the central bank.

“This move marks a meaningful shift in the monetary policy cycle, suggesting further rises are coming, and the unanimous decision shows strong conviction by the board,” Mr Magnusson said.

Global X ETFs senior investment strategist Marc Jocum said more rate hikes would come.

“The hike is more of an ‘insurance hike’ and is about protecting the credibility of the inflation target and less so about the near-term growth outlook,” he said.

Mr Jocum says the most likely course of action is a hike in May or June.

“That pricing keeps the door open to further tightening should inflation fail to resume a clear downward trajectory, though today’s action should not be read as the beginning of a sustained hiking cycle,” he said.

Before Tuesday’s announcement, money markets had placed a 70 per cent chance on an interest rate hike.

The RBA acknowledge inflation was lower than at the beginning of the decade, but remained an issue.

“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.”

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.

Federal Treasurer Jim Chalmers said the RBA’s decision would be “difficult news for millions of Australians”.

“We understand the pressure that this will put on families and businesses,” Mr Chalmers said.

“While today’s decision was widely expected, that doesn’t make it any easier.

“We know many Australians are doing it tough which is why we continue to roll out responsible cost of living relief, including a further tax cut later this year and another one next year.

At the same time we’re doing what we can to strengthen the budget and address our longstanding productivity challenge.

What it will cost mortgage holders

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.”

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.