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Australia’s central bank has lifted interest rates for the first time since 2023, one of the first big economies to tighten its monetary policy, in an effort to combat inflation.
The Reserve Bank of Australia increased rates by 25 basis points to 3.85 per cent on Tuesday, with the board unanimous in its decision to reverse a cut six months ago. The Australian dollar rose 0.8 per cent against the US dollar.
Michele Bullock, the bank’s governor, said the “underlying pulse of inflation is too strong”, as she refused to rule out more rises in the coming months.
“I don’t know if it’s a cycle. Certainly it’s an adjustment,” she said when asked if the decision to reverse an interest rate cut made only six months earlier was the start of a period of rises.
Jim Chalmers, Australia’s treasurer, said that the rate rise would increase pressure on mortgage holders and businesses. “This will be difficult news for millions of Australians,” he said in an address to parliament.
He dismissed opposition criticism that government spending under his Labor government had contributed to the central bank’s decision to raise borrowing costs, arguing that a rise in private investment was key to the pressure on the Australian economy.
The RBA had been tipped to lift the lending rate after data released last week showed that the inflation rate had risen to 3.8 per cent from 3.4 per cent in the 12 months to December, due to higher costs in housing, food and tourism.
The “trimmed mean” inflation rate, the RBA’s preferred measure which excludes volatile items, was 3.3 per cent. The central bank has set a target range of 2 to 3 per cent.
The rate rise was accompanied by a deterioration in the inflation outlook, with the RBA projecting that the headline rate would continue to rise well above target over the course of 2026.
Australia last raised interest rates in November 2023 and cut rates three times in 2025.
Economists remain divided on whether the rate rise will be a blip or if it signals a return to a tightening cycle in 2026.
Thousands of tourists had travelled to Australia over December and January for the Ashes cricket series against England, buoying prices ahead of the February meeting, analysts said. A stronger Australian dollar may also deter the central bank from tightening further, analysts said.
Given the market had previously factored in up to three rate cuts this year, Matt Bell, an economist with property services firm Oliver Hume, said “many now expect a period of wait and see”.
Bullock said that she understood that the bank’s volte-face on rates wasn’t “a good outcome” for mortgage holders, but argued that high inflation could not be tolerated.
“We’re actually in a really good position,” she said. “The labour market is really strong. Domestic demand is recovering. But it’s just that we’re supply constrained and we think we’re even a little more constrained than we thought back a little while ago.”
