RBA lifts interest rates for the first time in 2 years

At the February board meeting the Reserve Bank of Australia (RBA) provided no surprises by lifting the official cash rate by 0.25% to 3.85%.

The Reserve Bank Monetary Policy Board has begun a new tightening cycle, increasing the cash rate for the first time in two years.

On Tuesday afternoon (3 February), the Reserve Bank of Australia (RBA) Monetary Policy Board announced that it was lifting the cash rate for the first time in over two years.

The RBA has increased the official cash rate by 0.25 per cent – marking a return to a tightening cycle.

This takes the cash rate from its current level of 3.60 per cent to 3.85 per cent.

The RBA last lifted interest rates in November 2023 – when inflation was at 4.9 per cent and unemployment sat at 3.9 per cent.

Interest rates have remained unchanged since August 2025 – when the RBA delivered its third cut of the year, with markets and several banks believing that this would be the terminal rate for the rate-easing cycle.

Financial markets were generally expecting rates to increase, with the ASX 30 Day Interbank Cash Rate Futures Index trading at 96.24 as of 2 February, indicating a 72 per cent probability of a hike.

The shift to a tightening cycle has been driven by stickier‑than‑expected inflation and a labour market remaining tighter than many anticipated.

The RBA’s preferred quarter trimmed‑mean inflation for December came in at 0.9 per cent for the quarter while headline inflation accelerated to 3.8 per cent in the 12 months to December 2025, clearing market expectations of 3.6 per cent and up from November’s 3.4 per cents annual reading.

Unemployment has also been low, edging down from 4.3 to 4.2 per cent in December in trend terms (or 4.1 per cent, seasonally adjusted) – heightening concern that monetary policy may not have been as restrictive as previously assumed.

The policy decision was unanimous.

In its statement, the Monetary Policy Board said inflation had increased “materially” in the second half of 2025 and that it was “likely to remain above target for some time”.

Although outlining that the recent uptick in inflation was being fuelled by “temporary factors” the RBA expressed concern that “private demand is growing more quickly than expected.”

The RBA said that numerous indicators suggested that labor market conditions remained “a little tight” and that the unemployment rate was sitting “a little lower than expected.”

The board also left the door open to further hikes if needed to temper inflation, with the bank stressing it would not hesitate to do what it deemed necessary.

“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 statement read.

“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.”

What is the impact of today’s decision?

The rise could push average variable rates for owner-occupiers to roughly 5.77 per cent and effectively eliminate home loan rates starting with a four from the market, according to comparison website Canstar.

This would increase mortgage repayments by approximately $75–$80 per month ($900–$960 annually) for every $500,000 borrowed.

For an average $693,802 home loan, this would equate to an extra $1,313 per year in interest costs while someone with a $1 million mortgage would see an increase of about $150–$158 per month.

The next cash rate decision will be announced on 17 March 2026.

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This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.