RBA Raises Key Rate to 3.85% as Inflation Pressures Persist

Australia’s Central Bank Shifts Monetary Policy Stance

On February 3, 2026 the Reserve Bank of Australia (RBA) delivered an unexpected decision to raise its official cash rate from 3.60 % to 3.85 %, marking the first increase since late 2023 and reversing previous rate cuts made throughout 2025. The decision was unanimous among RBA board members, reflecting concern over renewed inflationary pressures.

The RBA’s move comes amid a rise in consumer price inflation to 3.8 % in December 2025, well above the bank’s 2–3 % target range. Recent data indicating persistent inflation and stronger private demand were cited as key reasons behind the shift in monetary policy direction, as the bank acknowledged that price pressures had proved more persistent than earlier expected.

Governor Michele Bullock stressed that the rate rise represents an adjustment to monetary settings rather than the beginning of an extended tightening cycle, though she did not rule out additional increases if inflation persists above target.

Australia’s Market and Economic Impact

Financial markets have already reacted to the rate hike, with the Australian dollar gaining against the US dollar and equity indices showing modest gains. Higher borrowing costs for households, especially mortgage holders, are expected as retail banks adjust lending rates in response to the RBA’s policy change.

The immediate economic outlook remains mixed: while a higher cash rate is intended to bring inflation back toward target, it also has the potential to weigh on consumer spending and business investment amid only moderate economic growth. Some analysts have raised concerns about housing affordability and rising household debt burdens as key risks.

Background on Australia’s Monetary Policy

Prior to this decision, the RBA had maintained relatively low interest rates after a prolonged easing cycle aimed at supporting economic activity and moderating inflation from its 2022–2023 peaks. However, recent data showed inflationary pressures re-emerging, prompting the bank to adjust its monetary stance.

International Investment Expert Summary:

As reported by experts at International Investment, the RBA’s decision to raise the key rate to 3.85 % demonstrates the central bank’s commitment to tackling persistent inflationary pressures and balancing economic stability. This shift in policy could have broad implications for credit markets, domestic demand and international investment sentiment.