RBA ups cash rate to 3.85% as wrangling inflation remains the key challenge

The RBA’s Monetary Policy Board today lifted the official cash rate by 25 basis points to 3.85%. The decision reflects the Board’s assessment that inflation has stabilised in a 3–3.25% range, remaining above its 2.5% target, with inflation described as having picked up materially in the second half of 2025.

Recent signs of stronger consumer spending and private demand, alongside December’s very low unemployment reading, formed an important part of the backdrop to the decision. Against this context, it would have been difficult for RBA staff to credibly produce a forecast showing inflation returning to target without some degree of policy tightening.

The key question now is what comes next. One-off monetary policy moves are rare in the absence of major global shocks, and this suggests a further rate increase in the coming months is likely. The post-meeting statement struck a characteristically hawkish tone, noting that inflation is expected to remain above target for some time.

The ultimate extent of the tightening cycle will depend on whether inflation continues to persist at above-target levels. In our view, inflation appears to have settled at a rate higher than the temporary 2.5% outcomes recorded in late 2024 and the first half of 2025, rather than already re-accelerating as the RBA suggests. If this assessment proves correct, only a modest further tightening may be required.

A more extended cycle could emerge, however, if tentative signs of stronger mining activity in Australia, firmer US growth, or renewed global supply chain disruptions become more pronounced.

While today’s rate rise will be unwelcome for many households and businesses, allowing inflation to remain above 3% after the substantial increases in living and business costs already experienced would ultimately benefit no-one over the longer term.