RBA raises cash rate to 3.85 per cent following inflation shock

The bank's governor, Michele Bullock, confirmed the board agreed to raise the cash rate by 0.25 per cent, to 3.85 per cent, at the first meeting of 2026.

The widely-expected decision reflects a 3.8 per cent uptick in the consumer price index in the 12 months to December 2025, up from 3.4 per cent in the year to November, which was higher than most economists predicted.

Trimmed mean inflation, the Reserve Bank's preferred measure, was 3.3 per cent in the year to December, up from 3.2 per cent.

Economists at The Australia Institute have argued the decision was hasty, given short-term factors are largely at the centre of rising inflation, but Ms Bullock said the "underlying pulse of inflation is too strong".

The Reserve Bank's target for inflation is 2.5 per cent, 1.1 per cent lower than year-ended headline inflation.

"It is important to note in judging the outlook for inflation that we don't just look at current inflation. We are trying ot target inflation over the time one to two years, given the time it takes interest rate changes to flow through the economy," Ms Bullock said.

"The board now thinks it will take longer for inflation to return to target, and this is not an acceptable outcome," she said. "We can not allow inflation to get away from us again."

Ms Bullock cited several factors for the inflation pick-up. She said demand was stronger than expected at the end of 2025, unemployment had remained lower than thought, and supply constraints were binding in several sectors, buoyed largely by limited productivity growth.

Australia's four major banks began predicting the hike last week following the release of consumer price index data.

The cash rate was steady at 3.6 per cent from October 2025, and was lowered three times from February 2025 following a post-pandemic high of 4.35 per cent.

The change puts pressure on Treasurer Jim Chalmers, who has consistently applauded the government's ability to improve the cost of living.

Economists have urged the government to return spending to pre-pandemic levels by cutting about $50 billion in spending.

That was documented in the Australian Chamber of Commerce and Industry's pre-budget submission to Treasury and echoed by the Organisation for Economic Co-operation and Development.

Mr Chalmers said inflation will be a major influence on the May federal budget and confirmed he did not feel government spending was the reason for the inflation uptick. Instead, he placed blame on persistent housing pressures and holiday spending.

"It won't be the only influence. We've got a long-term productivity challenge to turn around. We've got all of this global economic uncertainty as well. But inflation will be a major focus," Mr Chalmers told ABC Radio National this morning.

During House of Representatives question time, which ran at the same time as the Reserve Bank's announcement, the treasurer said he took responsibility "for all aspects of my job, including my part of the fight against inflation".

"We know that many Australians are doing it tough, which is why we continue to roll out responsible cost-of-living relief," he said during heavy scrutiny from the Liberals and crossbench.

Australians continue to feel pressure from the rising cost of living. In Canberra, almost 66 per cent of residents feel their money goes less far now than it did a year ago, polling from advocacy group Amplify showed. Of those polled, 16 per cent said more than half their income was being spent on housing.

Most variable mortgage rates are anticipated to rise from 5.5 per cent to 5.77 per cent if banks pass the rate rise on in full, Canstar mapping shows.

Knight Frank's chief economist Ben Burston said the rate change reinforced a need for income growth to drive returns in the commercial property market.

"The increase in rates will act to slow down nascent signs of yield compression, but the outlook for property returns remains on a solid footing given limited supply pipelines across multiple sectors, including office, industrial and living sectors," he said.

"This will act to drive rental growth over the medium term."