The Reserve Bank of Australia has raised the cash rate to 3.85% from 3.6%, marking the first rate hike in over two years. The decision, announced on Tuesday after a two-day meeting, was driven by a sharp and unexpected rise in inflation to 3.8%, well above the RBA's 2-3% target band.
RBA Governor Michele Bullock acknowledged the move would be unwelcome for mortgage holders but deemed it necessary. "Based on the data we've seen and the conditions here and around the world, the board now thinks it will take longer for inflation to return to target," she said. The quarter-point increase adds $90 to monthly repayments on a $600,000 home loan, bringing the total to $3,782, according to Canstar.
The hike ends the shortest rate-cutting cycle in the RBA's modern history, which saw three reductions last year. Banks quickly responded, with Commonwealth Bank raising variable rates by 25 basis points effective 13 February. Some experts had warned that a rate hike risked derailing the economic recovery, but the board voted unanimously for the increase.
The RBA's economic outlook forecasts headline inflation reaching 4.2% by mid-year, a level not seen since 2023. Governor Bullock left the door open for further hikes if inflation persists, stating, "We've made one rate rise this time, and we'll observe now what happens to financial conditions." Economists at National Australia Bank predict a follow-up 25 basis point hike in May.
Treasurer Jim Chalmers described the rate hike as "widely expected" but acknowledged it would be "difficult news for millions of Australians with a mortgage." The decision is a blow to the government's economic credentials, which had previously taken credit for bringing inflation under control. Inflation has been fueled by public and private sector spending, while Australia's economic capacity and productivity remain subdued.
