RBA increases official cash rate to 3.85%

The Reserve Bank of Australia has increased the official cash rate by a quarter of a percentage point, becoming the first major central bank to go from rate cuts to rate hikes following the post-COVID inflation spike.

In a unanimous decision on Tuesday, the RBA's monetary policy board lifted the cash rate to 3.85 per cent.

The move was tipped by most economists and expected by financial markets, which attributed a three-quarter chance of a rate rise ahead of the decision, after inflation increased back above the RBA's 2-3 per cent target band.

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

Inflation pressures picked up

"A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025. While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight," the statement said.

"The Board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures. As a result, the Board considers that inflation is likely to remain above target for some time."