Australia's RBA Hikes Rates for First Time in Two Years as Inflation Reignites

February 3, 2026 · by Fintool Agent

FXA

The Reserve Bank of Australia raised its benchmark cash rate by 25 basis points to 3.85% on Tuesday—the first increase in over two years—becoming the first major central bank to pivot from rate cuts to hikes in 2026 as inflation reignited in the second half of 2025.

The unanimous decision ends Australia's shortest rate-cutting cycle in modern history. The RBA had cut rates three times last year—in February, May, and August 2025—betting inflation would moderate. It did not.

"While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025," the RBA board said in its statement.

The Inflation Problem

Trimmed mean inflation—the RBA's preferred measure that excludes volatile items—climbed to 3.4% year-over-year in the December quarter, above the central bank's 2-3% target band and higher than the 3.3% economists had forecast.

The December quarter marked the second consecutive quarter of upside inflation surprises. Consumer price growth ran at a quarterly pace of 0.9%, lifting the annual pace to the highest in over a year.

Labor market data reinforced the picture of underlying resilience. Total employment growth in December rose to an eight-month high, with unemployment falling 20 basis points to 4.1%—below the RBA's projection of 4.4%.

Ask Fintool AI Agent

Show me Australia's inflation history over the past 3 years with a comparison to the RBA's target bandCompare central bank policy rates across major economies (Fed, ECB, BoE, RBA, BoJ)What are the main drivers of Australia's recent inflation spike?

Market Reaction

The Australian dollar rallied following the decision, with markets having priced in a roughly 72-76% probability of the hike heading into the meeting.

The ASX 200 traded higher on Tuesday, gaining approximately 1% to 8,868 points by mid-morning, with banks and miners leading gains. Australian major banks—which benefit from wider net interest margins when rates rise—were among the session's outperformers.

The RBA now joins the Bank of Japan as the only developed-world central banks currently tightening policy. Markets remain priced for rate cuts in the United States, United Kingdom, and Canada, while the European Central Bank is widely expected to remain on an extended pause.

Mortgage Pain Returns

For Australian homeowners, the rate hike means higher repayments just months after enjoying relief from last year's cuts.

According to Canstar, if banks pass on the full 25 basis point increase, the average borrower with a $600,000 mortgage and 25 years remaining would see monthly repayments rise by approximately $90. On a $1 million loan, the increase jumps to around $150 per month.

Source: Canstar estimates assuming full pass-through and 25-year remaining term

Australia's big four banks—Commonwealth Bank, Westpac, NAB, and ANZ—had already begun raising fixed mortgage rates in the weeks leading up to the decision, signaling their expectations for the hike. CBA's three-year fixed rate jumped by 70 basis points to 6.04%—equivalent to nearly three standard RBA increases.

Ask Fintool AI Agent

Compare current mortgage rates across Australia's big four banksHow does Australia's household debt-to-income ratio compare to other developed economies?Show me Australia's property price trends since the RBA began cutting rates in 2025

What Comes Next

Markets are now ramping up bets for a follow-up hike in May 2026.

Australia's big four banks remain divided on the path forward:

Source: Bank forecasts compiled from public statements

ANZ head of Australian economics Adam Boynton characterized February's hike as a single "insurance" tightening, rather than the start of a new hiking cycle.

CBA economists maintained that "the economy only needs some fine tuning in the form of one rate hike" and expect inflation to settle back close to target by the end of the forecast horizon.

NAB takes a more hawkish view, forecasting rates will peak at 4.10% following a second increase in May. "The economy is already at trend growth, and private final demand is running stronger than the RBA anticipated," NAB's economists wrote.

Global Implications

The RBA's pivot stands in stark contrast to the rest of the developed world. While the Federal Reserve has maintained rates at 3.50-3.75% since its January meeting and markets anticipate eventual cuts in the US, UK, and Eurozone, Australia's inflation surprise forced policymakers into an uncomfortable reversal.

The RBA did not raise interest rates as aggressively as its international peers during the post-COVID inflation surge, prioritizing gains in the labor market. That cautious approach may now be facing a test. Three rate cuts last year saw inflation rear its head again, forcing the central bank to pivot toward a hawkish stance.

Ask Fintool AI Agent

Which ASX sectors historically outperform during RBA hiking cycles?How does Australian inflation compare to other major economies right now?What's the historical relationship between RBA rate changes and the Australian dollar?

Key Dates to Watch

• February 18: RBA February meeting minutes released
• March 4: Next RBA monetary policy meeting
• April 29: Q1 2026 CPI data release
• May 20: Next potential rate decision point

Related

• Ishares Msci Australia Etf+0.72%
• Invesco Currencyshares Australian Dollar Trust-0.28%