Australia’s Central Bank Raises Interest Rate to 3.85% After Three Cuts

Australia’s central bank lifted its benchmark interest rate by 25 basis points to 3.85%, reversing a string of three rate cuts last year as inflation climbed above its target, signaling a renewed tightening cycle to keep price growth in check.

By Sarah Mitchell – Senior News Correspondent

Last Updated: Feb. 2, 2026

RBA Raises Cash Rate as Inflation Rises

The Reserve Bank of Australia (RBA) raised its official cash rate by 25 basis points to 3.85% on Tuesday in its first rate increase since November 2023, ending a brief easing cycle that included three cuts in 2025. The board’s decision came as inflation accelerated, with consumer prices rising faster than expected, prompting policymakers to act to keep price growth within the RBA’s 2–3% target range. The move was unanimous and widely anticipated by markets. :contentReference[oaicite:0]{index=0}

Inflation Picking Up and Economic Context

Inflation in Australia climbed to around 3.8% in December 2025, above the central bank’s preferred range, after having eased substantially earlier in the year. The RBA noted that inflation had picked up materially in the second half of 2025, driven by stronger private demand, capacity constraints and resilient activity across sectors. These factors persuaded the board that the previous rate cuts were no longer appropriate for the current environment. :contentReference[oaicite:1]{index=1}

Impact on Households and Borrowers

The rate hike will quickly affect borrowers, especially those with variable‑rate mortgages. Major Australian banks — including Commonwealth Bank, Westpac, NAB and ANZ — responded by raising their home loan variable interest rates by 25 basis points, meaning many mortgage holders will see higher monthly repayments starting mid‑February. Economists warn that the increase could strain household budgets, particularly for those with large loans or stretched finances. :contentReference[oaicite:2]{index=2}

RBA’s Forward Guidance and Outlook

Reserve Bank Governor Michele Bullock and the Monetary Policy Board signaled that inflation is likely to remain above target for some time, leaving the door open for further rate increases if price pressures do not ease. Policymakers emphasized that future decisions will depend on incoming economic data, particularly inflation and labor market trends, as they balance price stability with broader economic growth. :contentReference[oaicite:3]{index=3}

Significance of the Policy Reversal

This decision marks a notable reversal in Australia’s monetary policy after three rate cuts last year in response to easing inflation and concerns about growth. The RBA’s move underscores ongoing uncertainties in the economy and reflects the challenge of managing inflation that has proved more persistent than expected. Markets have already begun pricing in the possibility of further tightening if inflation remains elevated. :contentReference[oaicite:4]{index=4}