Too-high-for-comfort inflation sees RBA hike cash rate

Yasmine Raso

Senior Journalist, Financial Newswire

3 February 2026

After the Australian Bureau of Statistics (ABS) returned some hotter-than-expected end-of-year inflation figures, the Reserve Bank of Australia (RBA) has met market expectations and increased the official cash rate by 25 basis points to 3.85 per cent at its first monetary policy meeting of 2026.

This comes as the central bank’s preferred measure of underlying inflationary movements – trimmed mean inflation – has sat at or above the top end of its target range of two to three per cent since August last year, pointing to a higher likelihood of commencing another tightening cycle to bring inflation back within target.

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

“Capacity pressures reflect, in part, the gr”ater momentum in demand seen in recent months. Growth in private demand has strengthened substantially more than expected, driven by both household spending and investment. Activity and prices in the housing market are also continuing to pick up.

“Financial conditions eased over 2025 and it is uncertain whether they remain restrictive. Credit is readily available to both households and businesses and the effects of earlier interest rate reductions are yet to flow through fully to aggregate demand, prices and wages. More recently, the exchange rate, money market interest rates and government bond yields have risen following a rise in market expectations for the cash rate.”

The unanimous decision confirmed the board is closely following the data and asserted that inflation is “likely” to remain above target.

“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 board said.

“Various indicators suggest that labour market conditions remain a little tight and that they have stabilised in recent months, in line with the pick-up in momentum in economic activity. The unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates. Growth in the Wage Price Index has eased from its peak, but broader measures of wages growth continue to be strong and growth in unit labour costs remains high.

“There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive. On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures. Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside.”

RBA Governor, Michele Bullock, also said that the board will remain “attentive” to the data and any changes to its current outlook.

“It will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome.”

At the same as delivering its first monetary policy decision of the year, the RBA also released its quarterly Statement on Monetary Policy which confirmed its expects inflation remain above its target range until June 2027.

“Prices have gone up for a broad range of goods and services. Australian households and businesses have been spending more, the jobs market has remained strong, and the global economy has held up better than we expected.

“The Australian economy is likely to grow a bit faster this year than we previously thought. The recent pick-up in spending by Australian households and businesses is likely to continue this year, providing a boost to the overall economy, before easing off a little.

“The jobs market is expected to remain healthy. The unemployment rate is expected to stay around its current low levels this year, and to increase only gradually after that.

“Inflation is expected to be above the 2–3 per cent target range for a while longer. Some of the recent price pressures are likely to continue and we expect inflation to be above the target for some time.”