It didn’t take an expert economist to predict a likely rate increase when the Reserve Bank Board (RBA) met for the first time this year, delivered its decision on Tuesday, 3 February at 2.30pm. But the skill in predicting whether it would be a 0.25% or 0.50% interest rate hike was for the more qualified.
At this sitting, the RBA eased the pain with just a 0.25% base rate increase, from 3.60% to 3.85%. And there was almost the sense that the Board regretted not increasing the rate by 0.25% at either their 04 November 2025 Melbourne Cup meeting, or the final meeting for 2025 on 09 December. For some, that was a signal to delve deeper into a highly inflated property purchase.
For long-term analysts, there were some history-making moments behind the RBA decision.
For instance, a rate rise today marks the shortest rate-cutting cycle in the past 50 years, following the three cash rate reductions in February, May and August 2025.
And a few, let’s call it what it was, 30% of analysts, did not expect a rate rise as they believed it would be an overreaction to the inflation jump across the second half of 2025 and set untempered parameters over traditional expectations.
But the RBA monetary policy board was viewing the bigger picture surrounding inflation that, in their view, was running untamed and would continue to do so without an immediate rate hike.
The Board especially called out growth in private demand from both excessive household spending and available cash reserves for investments, particularly in the housing market.
And while the base rate hike from 3.60 to 3.85% will affect mortgage holders the most, it is the first time in over two years that they have been asked to bear the brunt of dealing with the unexpected jump in inflation.
In a very real setting, the 0.25% interest rate jump will increase the cost on a $600,000 home loan by $90 a month, bringing the monthly repayment to around $3782
RBA chooses to act on inflationary data figures
The Reserve Bank has been very compassionate toward the policies of the Albanese Federal government over the past 12 months, with Treasurer Jim Chalmers activating paths he assured the Reserve Bank (RBA) would keep inflation trending in the 2 to 3% range, where it wanted to position the economy.
However, as logical and sincere as Jim Chalmers policies were, they have failed dismally, with inflation racing away at 3.8% for the 12 months to December 2025.
Given the proliferation of measures in place to track inflation, there is no single band of numbers that doesn’t require immediate attention to get the economy back within the RBA tracking range of 2 to 3%.
Price rises have accelerated and would have continued to do so if the RBA had failed to act.
The RBA target band to keep the economy on a level keel has been shattered with the Consumer Price Index (CPI) rising to 3.8% annually in December 2025, and that’s up from 3.4% in the full year to November 2025.
And even worse, for the month of December 2025, the CPI rose an aggressive 1% in an economy that appears to be building into a tearaway surge with few checks and balances, relying instead on federal government policies that have simply failed us all for the past 12 months.
Even when the purported more reliable new way of reading the economy through trimmed mean, a measure presented as being more accurate at calculating underlying inflation, that figure didn’t save the analysts who dreamt it up either, as it rose to 3.3% annually in December, up from 3.2% a month earlier. All well outside the RBA range of 2 to 3% and running full of steam in the wrong direction.
The RBA has allowed the federal government the opportunity to curtail the false optimism that prevails in several economic sectors, only to see those policies fail to rein in the likely prospect of uncontrolled inflation.
The RBA has a policy to strengthen the economy, and Board members have the expertise to manage the situation, but up until now, their action plan to maintain inflation at a 2 to 3% range has not been implemented in full.
Where prices rose most
There is no surprise that food prices were a major contributor to the annual inflation figure in December 2025, coming in at 3.4%. But on a scale of prices that need curtailing, supermarket shopping was below the top three protagonists in a brutal escalation of the inflation trend.
Sitting in second place on the inflation counter was electricity that was marked at 4.6% for the year to December 2025, when rebates were excluded.
But at the top of the trend, and continuing to add fire to the count, were housing prices at 5.5%. A sector that both governments and the RBA allow to surge unabated toward a major downward price correction, and the associated fallout that comes with a property bubble burst.
It will be a long haul that few will be able to bear if it’s left until the May budget for Treasurer Jim Chalmers to enact policies that aid in reducing inflation.
Instead, there will most likely be a mini-budget to address tax cuts and relief for mortage holders, and implementation of policies such as the Australian Greens’ controversial transformative housing policy that will strip away negative gearing/capital gains tax discounts.
Policies that would most likely have fallen through the cracks of federal Parliament house previously, but now may lead to a transformation in the property market that has been avoided up until now and lead us into a property ownership reality where first home-owners become the first priority.
Statement by the Monetary Policy Board: Monetary Policy Decision
Number 2026-03
Date 3 February 2026
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.85 per cent.
While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025. The Board has been closely monitoring the economy and judges 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.
Capacity pressures reflect, in part, the greater momentum in demand seen in recent months. 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. Financial conditions eased over 2025, and it is uncertain whether they remain restrictive. Credit is readily available to both households and businesses, and the effects of earlier interest rate reductions are yet to flow through fully to aggregate demand, prices and wages. More recently, the exchange rate, money market interest rates and government bond yields have risen following a rise in market expectations for the cash rate.
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 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.
There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive. On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures. Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside.
Decision
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 Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. 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.
Today’s policy decision was unanimous.
