RBA Poised for Rate Hike as Inflation Stays High

Australia's central bank, the Reserve Bank of Australia, is expected to raise its cash rate by 0.25 percentage points to 3.85% at its meeting on February 3. This would mark the first increase since late 2023, driven by inflation that came in higher than expected at 3.8% for the 12 months to December 2025. Price rises in housing, rents, and travel have stayed firm, while the job market shows strength with unemployment at 4.1%.

Background

The RBA has kept the cash rate steady at 3.60% since its last hike more than two years ago. Back then, the bank was battling high inflation from global supply issues and strong demand after the pandemic. Over time, headline inflation eased from double digits, but underlying measures like trimmed mean CPI stayed above the bank's 2-3% target.

In recent quarters, services prices such as rents and insurance have driven much of the pressure. Housing costs rose 5.5% over the year, and recreation prices climbed 4.5%. The RBA had hoped these would fade, but December data showed no let-up. Trimmed mean inflation hit 3.4% year-on-year, up from forecasts of 3.3%. Quarterly trimmed mean rose 0.9%, matching the prior period.

Labour data adds to the picture. Employment grew strongly in December 2025, with full-time jobs making up most of the gain. The unemployment rate dropped to 4.1%, below the RBA's own projection of 4.4% for the quarter. While part-time work has led some trends, overall conditions remain tight compared to history.

Household spending has slowed under cost pressures, and GDP grew at a modest 2.1% in the third quarter. Still, the mix of sticky inflation and a solid job market has shifted views. What was once talk of rate cuts has turned to hikes.

Key Details

The latest consumer price index from the Australian Bureau of Statistics covers the fourth quarter of 2025. Headline CPI rose 3.8% over the year, a six-quarter high that beat expectations. Key drivers included:

• New dwelling purchases up 1.3% in the quarter.
• Rents increasing 0.8% quarterly after 1.0% before.
• Holiday and travel costs jumping 4.9%.

These figures challenge the RBA's November statement that some inflation spikes were temporary. Electricity rebates and supply factors no longer explain the breadth of rises.

Economists now widely see a February move. The current cash rate of 3.60% sets the overnight borrowing cost between banks. A hike would push up variable mortgage and loan rates, squeezing borrowers' budgets.

Expert Views on the Hike

David Bassanese, chief economist at Betashares, called the data a clear signal.

"All up, it appears to be game, set and match for a rate rise at the February policy meeting. My base case is that the RBA will raise rates by 0.25%, taking the cash rate to 3.85%."

– David Bassanese, Betashares Chief Economist

Belinda Allen at Commonwealth Bank agreed the numbers confirm persistent pressures.

"The latest inflation data confirms that price pressures, while easing, are still too high. The accumulation of evidence supports our view that a cash rate hike is needed."

– Belinda Allen, Head of Australian Economics, Commonwealth Bank

Not everyone expects immediate action. Some at Westpac predict a hold in February but warn of hikes later if services inflation sticks. Most forecasts point to steady policy now, with upside risks ahead.

The Aussie dollar has climbed on the news, reflecting market bets on tighter policy. Shares dipped as higher rates loom over growth.

What This Means

A rate hike would hit households with bigger mortgage payments. On a typical $600,000 loan over 30 years, a 0.25% rise adds about $75 a month early on. For highly indebted Australians, this compounds cost-of-living strains from food and energy bills.

Businesses face higher borrowing costs, which could slow investment. Yet the RBA aims to cool demand enough to bring inflation back to target without sparking recession. GDP is not overheating, but persistent prices risk a wage-price spiral if unchecked.

Borrowers should brace for changes. Fixed-rate deals may lock in before the meeting, while variable rates adjust soon after. Savers could see better returns on deposits.

Globally, Australia bucks the trend. Many central banks ease as inflation falls, but here local factors like housing keep pressure on. The RBA may signal more hikes if first-quarter 2026 data stays hot, or pause if growth weakens.

Labour resilience buys time, but volatility in December-January jobs figures means caution. Full-time gains support spending more than part-time ones, yet overall tightness keeps inflation alive.

Markets price in an 80% chance of a hike next week. The bank's statement will hint at pace—cautious steps likely given balanced risks. Two hikes in 2026 could suffice to tame prices without derailing the economy.

For everyday Australians, this means watching bills closely. Higher rates curb spending power but build toward stable prices long-term. The February decision sets the tone for the year ahead.