The Reserve Bank of Australia (RBA) has increased the official cash rate (OCR) by 25 basis points to 3.85%. The unanimous decision was driven by increased inflation.
"While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025," read a statement from the RBA. "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."
During Tuesday afternoon's press conference with reporters, RBA Governor Michele Bullock said: "High inflation hurts all Australians."
She added that the board's decision "is not the news that Australians with mortgages want to hear. But it is the right thing for the economy."
All of Australia was holding its breath on Tuesday afternoon as the RBA finished off its two-day meeting on monetary policy, the first for 2026. Even with three rate cuts in 2025 — which brought the official cash rate (OCR) down to 3.6% last August — mortgage holders and investors were still hoping for extra relief as cost-of-living pressures mount and property prices keep climbing.
But stubborn inflationary pressures and relatively low unemployment were difficult for the nation's central bank to ignore.
After the August cuts, the RBA was clear that it would not keep cutting rates until inflation was back within the 2% to 3% target band. When prices began climbing unexpectedly last spring, markets — including some of Australia's major banks — started to question whether the next move could be a hike.
The latest consumer price index (CPI) showed inflation is far from easing, reinforcing the view that rates were more likely to rise than fall.
Both headline CPI and trimmed mean inflation were up in the 12 months leading up to December. Headline CPI rose 3.8%, up from 3.4% in November, while trimmed mean inflation jumped to 3.4% during the same time period, compared with a 3% increase in the 12 months leading to November 2025. Meanwhile, the nation's labor market remains tight, falling to 4.1% in December and adding pressure to the RBA to consider a rate hike.
Consumer spending hasn't taken a back seat either, showing that Australians are still spending despite higher prices, and adding fuel to the argument that inflation isn't showing signs of slowing down anytime soon. Household spending jumped 1%, month-over-month, to a record $79.35 billion in November, on a seasonally-adjusted basis, according to the Australian Bureau of Statistics' (ABS) Monthly Household Spending Indicator. That's an increase of 6.3% in the year.
"That [increase] would make the RBA a bit more nervous that inflation would be elevated for longer and so would force them to increase rates to kind of cool the economy a little bit," Ashwin Clarke, senior economist at Commonwealth Bank of Australia (CBA), told Australian Broker. "The faster the economy grows, the more likely it is to breach its speed limit, and may cause inflation to increase.
The results rattled markets, prompting investors and mortgage holders to rethink not just rate holds, but the growing possibility of a rate hike. Australia’s Big Four banks, however, were firmly in the hike camp.
The RBA’s 25-basis-point rate hike jolted markets on Tuesday, prompting investors and mortgage holders to rethink their strategies, and wonder if more rate hikes are in the cards for 2026. Australian Broker rounded up key market players, revealing a mix of caution and recalibration, as the industry assesses the implications for borrowing costs, future property prices and the broader housing market.
Executive director at aggregator group Connective
"Today's rate increase adds further pressure for borrowers who have already absorbed a prolonged period of higher costs. Households are facing tougher decisions about spending, repayments and cash flow. Homeowners are more likely to pause upgrades, investors are approaching opportunities cautiously and small business owners are prioritising essential commitments.
"While the rate hike is likely to compress volumes in the short term, it presents an opportunity for brokers to strengthen their role as trusted financial intermediaries in a complex, volatile rate environment. To remain competitive, brokers should focus on providing strategic advice in areas such as pre- approvals, running scenario planning and helping borrowers assess whether rising property values create opportunities to restructure or upgrade. Reviewing loan structures, stress-testing repayments and guiding practical decisions are critical. Brokers who step in with timing, insight and actionable advice are the ones truly delivering value.”
Head of Australian economics at Commonwealth Bank of Australia (CBA)
"We now expect the RBA to follow up with a rate hike in May, taking the cash rate to 4.10%. There is unlikely to be enough hard evidence by May to prove that the initial rate hike is bringing down inflation and demand. The labour market is in better shape than expected and the resolve of the RBA is also stronger than we had anticipated. There have been some material shifts in economic forecasts in the statement on monetary policy. GDP and unemployment forecasts look pessimistic in 2027. But the focus will be on inflation remaining above 3% beyond 2026."
Senior economist at REA Group
"The RBA remains focused on inflation, and with underlying inflation above both the RBA’s target band and what it had forecast back in November, the argument for a rate cut to start the year was strong. How inflation evolves across the start of 2026 will be the driver for where interest rates go from here. At the moment, another hike is expected by mid-to-late 2026. But whether that happens will be dictated by how persistent inflation is.
"Home prices are still expected to grow across 2026 on the back of last year's cuts and strong economic and housing fundamentals. And, population growth is solid amid relatively constrained new supply. However, higher rates this year will slow price growth down compared to the pace recorded last year.”
Associate professor in finance at the University of Sydney Business School
"The RBA signalling an increase in interest rates would likely portend future rate rises. A 25 basis point increase on a $500,000 mortgage is nearly $1,000 per year. This will certainly affect the most constrained households in the country. However, investors and those with long-term savings will benefit through a greater return on investment. And the Australian dollar is likely to continue upwards."
Managing director at Finance Brokers Association of Australia (FBAA)
"[Some brokers] don’t know that lenders often incentivize new business by offering lower rates to new customers, compared with what they provide to existing customers. Brokers are presented with an opportunity to provide another level of service and lock in customers for life. Brokers should tell [borrowers] about the ‘lender loyalty tax.' If the lender won't budge [on rates], the broker should help the customer refinance at a lower rate. Our role [as brokers] is to educate borrowers."
Chief executive officer at Mortgage Choice
"A rate rise was largely expected. The economy is simply running hotter than the RBA would like. For those looking to buy, the RBA's decision is a signal to sharpen your strategy. If buying your first, or next home, is part of your plans for 2026, a rate hike will likely have an immediate impact on your borrowing power. That said, the biggest mistake a buyer can make right now is assuming a bank's first answer is their only option. Each lender views risk differently. What one bank says [a borrower] can borrow may be very different to what another lender can offer."
Data insights director at Canstar
"We’re now four years into the battle with high inflation and while great progress was made initially, the RBA is fast running out of time to get the job done. For a typical owner-occupier with a $600,000 mortgage, the hike would add around $90 a month to repayments. While plenty of borrowers will be able to cop this on the chin, it comes on the back of an uptick in the cost of essentials, such as food, and the end of the electricity rebates. It could be the tipping point for those households already running on tight budgets. The RBA rate hike will hit everyone with a variable rate mortgage. Also, after this rate hike, the refinancing frenzy will kick off again and the more people in it, the more competitive the banks will get."
“What this means for an average household mortgage of $694,000 is an extra $109 in monthly repayments, which will be felt most by borrowers who reduced repayments during the last easing cycle. The higher rate environment also makes it tougher for first-time homebuyers looking to take advantage of the Australian government's Home Guarantee Scheme, as higher rates can reduce borrowing capacity for those trying to enter the market. Despite the hike, it does not mean borrowers are out of options. The smartest step borrowers can take is to speak to their mortgage broker. Brokers can explore a range of options and that includes options to improve serviceability, securing a sharper rate with an existing lender, refinancing to a different lender or consolidating debt to improve cash flow."
Chief economist at credit agency CreditorWatch
"The board considers inflation likely to remain above target for some time. [That] suggests a second move is likely in the next few months, almost certainly in May. One-off monetary policy moves are rare, unless there are significant global developments in the interim."
Economic director at Compare the Market
"The RBA is walking a tight rope right now. They've got to factor in the uncertainty we're seeing overseas, and how the Aussie dollar is faring. An increase in interest rates will have a direct and immediate impact on household budgets, particularly for borrowers with larger mortgages. [For example], just one 0.25% rate rise could push monthly repayments up by about $94 for someone with a $600,000 mortgage. That's equal to $1,128 a year."
Business and investment lead at CPA Australia
"Small businesses remain under pressure from high borrowing costs, rising inflation and low consumer confidence. Many small businesses will have little choice but to pass some of these costs on to customers. Others will need to rethink investment and growth plans to manage cash flow and financial risk.”
Chief executive officer at Master Builders of Australia (MBA)
"The pain caused by today’s decision will also fall on small construction businesses and mums and dads embarking on new builds, as inflation and rate rises makes businesses more cautious and reduces margins in household budgets. [Higher rates will] suppress construction activity, including higher-density home building approvals, [which] are particularly sensitive to interest rate movements. The vast majority of money for commercial building projects comes from private sector investment. Higher inflation and interest rates makes business investment more expensive and less attractive by reducing returns and increasing the cost of inputs."
