Australia’s central bank has reversed course. On February 3, 2026, the Reserve Bank of Australia (RBA) lifted the cash rate by 25 basis points to 3.85%, its first increase in more than two years after a short run of rate cuts in 2025. The move signals the RBA believes inflation risks are re‑accelerating, and it puts renewed pressure on households that were hoping the worst of the mortgage squeeze was over.
What triggered the rate hike?
The immediate backdrop is inflation. Headline inflation rose to 3.8% in December 2025, a pick‑up from 3.4% the month before, pushing prices further above the RBA’s 2–3% target band. Measures of underlying inflation have also proven “stickier” than policymakers want, suggesting that price pressures are not limited to one‑off spikes. In plain terms: costs are still rising too quickly across too many categories for the RBA to feel comfortable.
The RBA has also been watching a labor market that remains tight by historical standards. When unemployment is low and wage growth is steady, price pressures can linger especially in services. Add in strong population growth, a stretched housing market, and supply constraints, and the central bank’s caution starts to look less surprising.
Why this is a big pivot
In 2025, the RBA delivered three rate cuts, responding to the view that inflation was trending down from its post‑pandemic highs. February’s hike is therefore a credibility moment. Central banks hate reversals because they can confuse households and markets. But the message from the RBA is that the data changed and policy must follow.
This pivot is also a reminder that inflation is not just a “global” story. Even as energy prices and freight costs ease, domestic factors rents, services inflation, labor availability, and capacity limits can keep overall inflation elevated. That is why the RBA is framing the decision as a reset aimed at preventing higher inflation expectations from becoming entrenched.
What it means for mortgage holders and renters
If commercial banks pass the increase through to variable loans, monthly repayments will rise again. For a typical $600,000 mortgage, estimates suggest the hike could add around $90 a month. That may sound small in isolation, but it lands on top of several years of elevated repayments and cost‑of‑living pressures. Borrowers with large balances or coming off fixed rates are likely to feel it most.
Higher rates can also feed into rents indirectly. Landlords with mortgages may try to pass on costs, though rental markets depend on supply, vacancy rates, and income growth. With housing shortages in many cities, the bargaining power often sits with landlords, meaning rate changes can ripple beyond homeowners.
Housing markets are likely to be the first place Australians notice the change. A higher cash rate reduces borrowing capacity, which can cool demand and slow price growth especially for first‑home buyers who are stretched. But supply is still tight, so the outcome may be a “softening” rather than a sharp drop.
For the economy, the hike is designed to temper spending without triggering a recession. If consumers pull back, retail and services will feel it, while businesses may delay hiring or expansion plans. Markets will watch the Australian dollar and bond yields for signs that investors expect further tightening.
What to watch next
The RBA is signalling it will be “attentive to the data.” For households, that means the next few inflation prints matter more than ever especially measures of underlying inflation and services prices. The labor market is the other key variable: if employment remains strong, the RBA may worry that demand will keep outstripping supply. If unemployment rises sharply, the bank may decide this hike was enough.
For investors and businesses, watch the central bank’s forecasts. Some reporting suggests policymakers see inflation potentially peaking above 4% in mid‑2026 and returning to target only around mid‑2027. If that outlook holds, the risk of additional tightening is real, even if the RBA prefers to move slowly.
Bottom line
The RBA’s February 2026 decision re‑opens an uncomfortable chapter for households: higher‑for‑longer interest rates. But it also reflects a hard lesson of the mid‑2020s—getting inflation back to target is rarely a smooth, one‑direction journey.
