RBA interest rates rise by 25 basis points to 3.85 per cent
Home borrowers have copped the first rate rise in two years. Average monthly repayments are soaring by $100. The Reserve Bank of Australia’s new forecasts also show inflation won’t be tamed until late 2028.
The Reserve Bank has today raised interest rates for the first time in more than two years, adding $100 to monthly repayments on an average, new mortgage, as it warned of inflation remaining a challenge into late 2028.
Governor Michele Bullock and her monetary policy board have announced a 25 basis point hike, taking the cash rate to 3.85 per cent and reversing the effects of the August rate cut.
“The board now thinks it will take longer for inflation to return to target and this is not an acceptable outcome,” Ms Bullock told reporters in Sydney on Tuesday afternoon following her first two-day meeting for 2026.
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By continuing you agree to our Terms and Privacy Policy.“I know this is not the news that Australians with mortgages want to hear but it is the right thing for the economy.
“We cannot allow inflation to get away from us again. It’s not just one thing. The pick-up is due to a combination of factors across a broad range of components and sectors. We don’t want this higher level of inflation entrenched.”
This is also the first hike since November 2023, during an era of 13 increases in 18 months, and revives a new nightmare for home borrowers taking on large mortgage debts, after the RBA had cut rates three times last year.
The RBA’s new statement on monetary policy also forecast both headline and underlying, trimmed mean inflation being at 2.6 per cent in June 2028, which would be above the mid-point of its 2-3 per cent target more than two years from now. Inflation was forecast to remain outside the target band until mid-2027.
“While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” the RBA said.
“The board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures.”
Headline inflation soared to 3.8 per cent at the end of last year, up from November’s 3.4 per cent annual pace, following the end of the Federal Government’s $75 quarterly electricity rebates that had been extended for six months in the pre-election March Budget.
But even without volatile price items, trimmed mean inflation grew by 3.3 per cent in 2025, with this the RBA’s preferred measure of price increases.
Soaring private sector demand was blamed for the price pressures, with high government spending not mentioned in its accompanying statement announcing the rates decision.
“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 RBA said.
Ms Bullock declined to say if excessive government spending was a problem, after shadow treasurer Ted O’Brien on Tuesday blamed Labor for the inflation surge.
“I’m not going to comment on fiscal policy because it’s an independent policy,” she said.
KPMG chief economist Brendan Rynne said high government spending had pushed up inflation.
“Importantly the RBA cannot be the only dog in this inflation fight,” he said.
“Government spending, which has been adding to aggregate demand at the margin, needs to also be reined in to help better balance the demand and supply pressures driving the current push up in inflation.”
The first hike in more than two years will add $111 to monthly repayments on an average, new loan of $694,000 in a climate of unaffordable housing.
Variable mortgage rates will hit 6 per cent and see the typical working couple borrower paying $4157 a month servicing their home loan.
With unemployment now back at 4.1 per cent, the RBA has emphasised the jobless rate was lower than expected, after last year talking about preserving gains in the labour market during an era of prolonged productivity weakness.
“The unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates,” the RBA said.
“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.”
New forecasts have the jobless rate rising to 4.3 per cent by December 2026 and only edging up slightly to 4.5 per cent by December 2027.
But economic growth was forecast to weaken from an already below-average 2.3 per cent in December 2025 to just 1.6 per cent from June 2027 onwards.
