RBA Interest Rate Hike 2026: Australia Raises Cash Rate to 3.85% Amid Sticky Inflation

In a significant shift in monetary policy, the Reserve Bank of Australia (RBA) raised its cash rate by 25 basis points to 3.85 % at its February 2026 board meeting — the first hike since 2023 as inflation pressures in the economy remained stubbornly above target.

The decision reflects the RBA’s concern that inflation, which had previously eased, showed renewed strength in late 2025 and into early 2026 — with underlying price increases in services and other sectors keeping inflation above the central bank’s 2 %–3 % target range.

Why Did the RBA Raise Rates?

Governor Michele Bullock and the RBA’s Monetary Policy Board cited several factors behind their decision:

• Higher-than-expected inflation: Headline inflation and core measures remained elevated, with inflation pressures spreading across goods and services.

• Strong private demand: Consumer spending and demand in parts of the economy were more resilient than anticipated, adding to capacity constraints that can keep prices rising.

• Tight labour market conditions: Employment remained firm, a dynamic that can sustain wage pressures and contribute to ongoing inflation.

Taken together, these signals indicated to the RBA that doing too little now could allow inflation expectations to become entrenched, potentially requiring steeper tightening later.

Households and Banks Feeling the Impact

The rate hike isn’t just a technical shift — it has real implications for ordinary Australians and financial markets:

• Major banks have already passed on the rate increase, raising variable home loan interest rates, which will push up monthly mortgage repayments for many borrowers.

• Premier and state leaders have raised concerns about the effects on working families, emphasizing that higher rates can strain personal budgets amid existing cost-of-living pressures.

For homeowners, even a modest 25 bp rise can add noticeable costs — especially for those with large variable-rate mortgages — and may slow housing market activity.

The RBA’s move also rippled through financial markets:

• The Australian dollar (AUD) strengthened shortly after the RBA announcement, suggesting that higher rates attract capital flows and support the currency.

• Equity markets saw mixed responses, with local stock indices retreating slightly as the outlook for corporate financing tightened.

• Economists now see a greater possibility of additional rate rises in 2026 if inflation doesn’t moderate as projected, though the RBA has not committed to a specific path beyond this meeting.

Raising the cash rate to 3.85 % signals a clear policy stance: the RBA is prepared to tighten monetary conditions to keep inflation anchored. This is a shift from last year’s multiple rate cuts designed to support growth and reduce borrowing costs.

In practical terms:

• Borrowing costs will rise for households and some businesses.

• Savings yields may improve slightly, benefiting depositors.

• Housing investment and construction activity may slow as financing becomes more expensive.

• Consumption patterns could soften if higher interest rates dampen spending.

This delicate balancing act — between controlling inflation and avoiding recessionary pressures — is central to the RBA’s mandate.

While the RBA’s board left open the possibility of future rate increases, its focus remains data-driven. Continued monitoring of inflation, labour market indicators, and global economic conditions will shape subsequent decisions throughout 2026.

For markets and households alike, this marks a turning point: Australia’s monetary policy is no longer accommodative, and both lenders and borrowers are adapting to a tighter interest rate environment.

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