Perth, Feb 3: Australia’s central bank has raised interest rates for the first time in more than two years, lifting the cash rate by 25 basis points to 3.85 per cent at its February meeting.
The Reserve Bank of Australia said inflation, while well below its 2022 peak, picked up materially in the second half of 2025 and is now expected to remain above target for some time. The decision was unanimous.
The RBA cited stronger-than-expected private demand, rising housing activity and persistent capacity pressures as key drivers behind the move. Household spending and business investment have accelerated, while credit remains readily available and financial conditions have eased more than anticipated following earlier rate cuts.
Labour market conditions also remain tight, with unemployment lower than forecast and underutilisation subdued. While growth in the Wage Price Index has moderated, broader wage measures and unit labour costs remain elevated, adding to inflationary pressure.
Markets had largely anticipated the decision. By late January, traders had priced in a 72 per cent chance of a hike, with trading activity and volumes lifting into the meeting.
Commentary attributed to Kylie Purcell, Senior Markets Analyst at Stake, noted limited market reaction despite the policy shift:
Australia’s central bank has lifted the cash rate by 25 basis points, for the first time in over two years. The rate change follows higher than expected inflation figures published in January, as well as ongoing falling unemployment.
With the rate now sitting at 3.85%, we’re not likely to see a big market reaction. As of the end of January, the market had been pricing in a 72% chance of a rate hike to 3.85% in the leadup to today’s meeting. Trading activity on Stake AUS was up 25% over the last seven days compared to the week prior, while trading volumes were also up 47%. This heightened trading reflects how closely watched today’s move has been.
Australia’s inflation now sits above the U.S. and the U.K., and we can expect to see slower consumer spending, and a stronger Aussie dollar.
The impact on equity markets will be broad. Growth and cyclical sectors will feel the impact, with their future earnings becoming less valuable. Banks and financial institutions are set to benefit the most, similarly defensive and staple stocks are less sensitive to hikes. Market segments more sensitive to rate increases include property, where higher borrowing costs hit developments and yields, and consumer discretionary stocks where mortgages and loan increases mean slower spending of non-essentials.
Economists also warned of heightened global risks amid reports of political pressure on the US central bank, including scrutiny of Jerome Powell by US President Donald Trump.
Nicholas Gruen, CEO of Lateral Economics, said: “It will destroy the Fed’s credibility and make inflation harder to manage,” Gruen said.
Other economists warned of broader spill-over effects. Kyle Rodda of Capital.com said higher risk premiums on US Treasuries could bleed into Australian bond prices, while Craig Emerson of Emerson Economics warned global confidence could plunge, potentially creating recessionary conditions.
James Morley, professor at the University of Sydney, said such actions would create: “huge dangers” for the US economy but for Australia, the likely consequence would be a stronger dollar.”
Despite tighter monetary policy, property prices are still expected to rise. Economists forecast national dwelling prices will increase by 4.19 per cent over the next 12 months, led by Perth (5.3 per cent), followed by Brisbane (4.8 per cent) and Sydney (4.7 per cent).
The RBA said it will remain guided by incoming data and evolving risks, and will do what it considers necessary to return inflation to target while supporting full employment.
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