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RBA Adjusts Cash Rate to 3.85% Amid Shifting Monetary Policy Outlook for 2026

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RBA Shifts Stance: Rate Hike in Early 2026 as Inflation Looms

The Reserve Bank of Australia (RBA) concluded 2025 by signaling a significant shift in its interest rate outlook, moving decisively away from anticipated cuts towards an extended hold or potential increases. This revised stance was quickly followed by a 0.25 percentage point increase in the official cash rate to 3.85% in early 2026. The decision unfolded amidst ongoing monitoring of inflation data and a divided economic forecast, with the RBA reaffirming its unwavering commitment to maintaining price stability and full employment throughout its scheduled monetary policy meetings in 2026.

RBA's Monetary Policy Stance and Outlook at the Close of 2025

In December 2025, RBA Governor Michele Bullock made it clear that interest rate cuts were not anticipated "on the horizon for the foreseeable future," identifying an extended hold or a rate rise as the primary options for the board's consideration. This sentiment was strongly echoed by RBA Deputy Governor Andrew Hauser, who indicated that rate reductions were unlikely in the near term, a position maintained despite a recent decline in inflation figures. At this juncture, the cash rate stood at 3.6%, a level that had been held steady since August 2025 following three rate reductions earlier in the year.

The RBA's core mandate involves targeting consumer price inflation between 2% and 3% while also aiming for full employment. Governor Bullock emphasized in December 2025 that the RBA would closely monitor incoming inflation data to assess whether pressures were persistent or temporary. She noted that if inflation remained persistent and did not trend towards the target, the board might consider adjusting interest rates. Decisions, she stated, would be made on a "meeting-by-meeting" basis.

"Interest rate cuts were not anticipated 'on the horizon for the foreseeable future,' identifying an extended hold or a rate rise as the primary options for the board's consideration." - RBA Governor Michele Bullock, December 2025.

Key Economic Indicators and Data Releases

The RBA meticulously utilizes data from the Australian Bureau of Statistics (ABS) to monitor its objectives. Key inflation and labor market data points released during this period included:

  • November 2025 Consumer Price Index (CPI): Recorded a 3.4% increase for the year ending November. The RBA's preferred trimmed mean measure of underlying inflation stood at 3.2%.
  • December 2025 Labour Force Figures: The unemployment rate was 4.1%. In November 2025, the unemployment rate was 4.3%, although employment levels decreased.
  • December 2025 Consumer Price Index (CPI): This crucial quarterly data release was scheduled for the end of January 2026, ahead of the RBA's first policy meeting of the year.

RBA Deputy Governor Hauser described the November inflation data as "helpful" but consistent with expectations, noting explicitly that inflation above 3% is considered elevated. He underscored the RBA's focus on long-term inflation targets, typically one to two years out, rather than short-term fluctuations.

Anticipation for Early 2026 Monetary Policy Decisions (Prior to Rate Adjustment)

Leading up to the RBA's first monetary policy board meeting of 2026 on February 2-3 (with the decision announced February 3), market pricing indicated a 34% probability of a rate hike in February, with a steady cash rate of 3.6% being the most probable outcome. However, by June, market pricing suggested a 93% chance of a rate hike, with a 0.25 percentage point increase fully priced in by August.

Economist Forecasts

Economist forecasts prior to this meeting presented varied outlooks:

  • NAB: Predicted two 0.25 percentage point hikes, in February and May.
  • CBA: Forecasted one hike in February.
  • Westpac and ANZ: Expected an extended period of rates on hold, though ANZ acknowledged a risk of a hike in early 2026.

Arguments for a Rate Increase

Arguments supporting a rate increase included inflation remaining above the RBA's target band (with trimmed mean inflation rising to 3.3% in December) and a low unemployment rate providing flexibility.

Arguments for Maintaining Rates on Hold

Arguments for maintaining rates on hold highlighted stable inflation expectations, moderate wage growth, global economic resilience, and the potential for a rising Australian dollar to help restrain inflation.

RBA Increases Cash Rate to 3.85%

The Reserve Bank of Australia followed through with its hawkish shift, increasing the cash rate by 0.25 percentage points, setting it at 3.85%. This adjustment came amidst observed persistent inflation. Following the RBA's decision, major Australian banks, including the Commonwealth Bank, swiftly announced corresponding increases of 0.25 percent per annum on home loan variable interest rates, with CBA's change scheduled to take effect on February 13.

Subsequent Market and Economist Assessments (Post-Rate Adjustment)

Following the increase of the cash rate to 3.85%, market analysts immediately recalibrated, indicating a 71-72% probability of the RBA increasing interest rates further in its next decision. However, economists' predictions for this subsequent decision were notably divided:

Economist Predictions

  • Rate hold: Independent economist Nicki Hutley and Cassandra Winzar.
  • Rate rise: Australian National University economist Warwick McKibbin and Monash University economist Robert Brooks.

Arguments for a Further Rate Increase

Arguments for a further rate increase cited rising inflationary expectations and the view that interest rates around 4% represent a more conventional level compared to pandemic-era settings. RBA Deputy Governor Hauser's comments also strongly indicated the central bank's focus on returning inflation to its 2-3% target.

Arguments for Holding Rates Steady

Arguments for holding rates steady included declining real wages, stalled household income growth, and consumer pullback. Global uncertainties, such as the Middle East conflict and its potential impact on prices, were also noted as significant factors for consideration.

Deputy Governor Hauser stated that the RBA, with the cash rate now at 3.85%, was in a position to assess economic developments before making its next move, historically favoring periods of rate stability. He reiterated that "inflation above 3 per cent... is too high," and that the bank is explicitly tasked with maintaining inflation between 2% and 3%.

"Inflation above 3 per cent... is too high. The bank is tasked with maintaining inflation between 2% and 3%." - RBA Deputy Governor Andrew Hauser.

Alongside its February interest rate decision, the RBA was scheduled to publish its quarterly Statement on Monetary Policy, including updated economic forecasts. Current RBA expectations for underlying inflation for the December quarter of 2025 suggested it might be slightly higher than forecasts issued in November. Previous forecasts had assumed inflation above 3% into 2025 and 2026 before returning towards the 2.5% target, under the assumption of eventual interest rate reductions.

Impact on Australian Households

RBA interest rate adjustments directly affect borrowing costs and savings returns for Australian households. Canstar analysis indicated that a 0.25 percentage point rate hike could increase minimum monthly mortgage repayments by $90 to $150 for loans ranging from $600,000 to $1 million.

  • The average variable rate for existing owner-occupiers was 5.51%.
  • The average fixed rate for new owner-occupier loans (three years or less) was 5.1%.
  • New home loan borrowers were typically paying approximately 5.5% interest.

Fixed rates had already increased in December 2025, with 43 lenders, including three of the four major banks, implementing hikes. Expectations were that most, if not all, banks would pass on a full 0.25 percentage point increase to borrowers if the RBA implemented a hike. The impact on savings rates was less uniform, with the average ongoing savings rate at 3.07%, though higher rates were available through market comparison.

Scheduled RBA Monetary Policy Meetings for 2026

The RBA monetary policy board is scheduled to meet eight times in 2026. Decisions are released at 2:30 PM Sydney time (AEDT/AEST) on the following dates:

  • February 3
  • March 17
  • May 5
  • June 16
  • August 11
  • September 29
  • November 3
  • December 8

Following each decision, Governor Michele Bullock conducts a press conference. A statement from the board accompanies the decision, and the minutes of the meeting are released two weeks later.