The Reserve Bank of Australia (RBA) has sharply shifted course in its first monetary policy meeting of 2026, raising the official cash rate by 25 basis points to 3.85 per cent. The move – the first rate increase in more than two years – marks a reversal of much of the easing that characterised policy through 2025 and signals a renewed focus on combating persistent inflation.
Inflation Pressures Drive Policy Recalibration
The RBA Board’s decision, announced on Tuesday, responds directly to a re-acceleration in inflation late last year. Official figures show that the annual consumer price index (CPI) rose to around 3.8 per cent in December 2025, above the central bank’s 2–3 per cent target range, prompting policymakers to reassess the outlook.
In its accompanying statement, the RBA noted that inflationary pressures had “picked up materially” in recent months, undercutting earlier expectations of a more sustained easing trend. Although price growth remains below the peaks seen earlier in the decade, the central bank judged that tightening financial conditions were needed to prevent inflation becoming entrenched.
Impact on Households and Mortgage Holders
The immediate consequence of the rate rise is a prospective increase in borrowing costs for Australian households. The RBA’s cash rate is the benchmark for lending and typically flows through to higher interest rates on variable-rate mortgages and other loans. If banks pass on the full 0.25 per cent increase to customers, mortgage holders could see significant additions to monthly repayments.
For example, an owner-occupier with a $600,000 loan on a standard 25-year term could face roughly $90 a month in extra repayments, while a $1 million mortgage might cost approximately $150 more per month – an added strain on household budgets already burdened by rising living costs.
Lenders and Banks Respond
In the immediate aftermath of the RBA’s announcement, Australia’s major banks moved quickly to adjust their rates. Commonwealth Bank, ANZ, NAB and Westpac have all confirmed they will increase variable home loan rates by 25 basis points, generally effective from mid-February. This swift pass-through underlines how quickly central bank decisions filter through to retail borrowers.
Economic Context and Risk Assessment
The decision to hike rates comes against a backdrop of unusually mixed economic signals. While inflation has climbed above target, the labour market remains robust and broader economic growth has continued. Some analysts argue that the RBA’s shift may be justified to prevent inflation from becoming entrenched, while others caution that higher borrowing costs could weigh on consumer confidence and spending.
Indeed, experts remain divided on whether this increase marks the start of a broader tightening cycle. Some forecasters are modelling further rate rises later this year if inflation persists, while others suggest the central bank may adopt a more cautious approach in coming months.
Political and Public Reaction
The rate rise has already drawn political commentary. Treasury officials acknowledged the hardship the decision inflicts on households and businesses, with opponents seizing on the move to question government economic stewardship. Amid rising living costs, household budgets are under pressure, and higher mortgage repayments are likely to amplify concerns among voters.
Outlook and Next Steps
Looking ahead, the RBA has signalled that inflation may remain above its target range through much of 2026, with forecasts suggesting a possible peak later in the year unless price pressures abate. This has kept markets alert to the possibility of additional rate increases if inflation proves persistent.
For now, the 3.85 per cent cash rate stands as a clear reminder that the central bank is prioritising price stability—even at the risk of higher costs for borrowers and potential slowing in the housing market. Economic conditions and inflation data in coming months will be crucial in shaping the next steps of Australia’s monetary policy.
7 years in the field, from local radio to digital newsrooms. Loves chasing the stories that matter to everyday Aussies – whether it’s climate, cost of living or the next big thing in tech.
