As widely tipped by financial markets (~70% probability), the Reserve Bank of Australia (RBA) unanimously voted to lift the official cash rate by 25 bps to 3.85%:
The increase will add roughly $110 to the monthly cost of servicing the average-sized $700,000 new mortgage.
In arriving at its decision, the RBA noted that inflation “picked up materially in the second half of 2025”. Moreover, the board noted 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”.
In particular, “growth in private demand has strengthened substantially more than expected, driven by both household spending and investment. Activity and prices in the housing market are also continuing to pick up”.
The above statements are an acknowledgment that underlying inflation is tracking well ahead of the RBA’s forecast.
The labour market is also running tighter than the RBA’s forecast:
“Various indicators suggest that labour market conditions remain a little tight and that they have stabilised in recent months, in line with the pick-up in momentum in economic activity”, the RBA media release noted.
“The unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates. Growth in the Wage Price Index has eased from its peak, but broader measures of wages growth continue to be strong and growth in unit labour costs remains high”.
The RBA, therefore, summarised its decision to raise the cash rate with the following:
“A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025”.
“While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight”.
“The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target”.
The Reserve Bank of Australia concluded by reaffirming its commitment to fulfilling its dual mandate of maintaining price stability and promoting full employment.
“The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome”.
Financial markets have tipped a second 25 bp rate hike for 2026, with a small chance of a third.
A second rate hike would collectively increase monthly mortgage payments on an average-sized new mortgage by around $220 and a third by around $330.
First home buyers that leveraged themselves to take advantage of Labor’s 5% deposit scheme will be particularly vulnerable.
I discussed the implications of a rate hike this morning on Radio 4BC:
