Australia’s central bank has lifted the interest rate, increasing the cash rate by 25 basis points to 3.85 per cent, as inflationary pressures re-emerged in the second half of 2025 and demand in the economy proved far stronger than policymakers expected.

In a unanimous decision, the Reserve Bank of Australia said inflation, while well down from its 2022 peak, had “picked up materially” in recent months and was now likely to remain above the bank’s 2–3 per cent target range for some time.

The move marks a sharp reversal from earlier expectations that Australia had entered a sustained disinflation phase, and has renewed scrutiny of the federal government’s failure to contain demand-side pressures, particularly in housing, migration and fiscal spending.

Inflation returns as demand runs hot

The RBA said its decision was driven by a clear shift in the balance of risks. Private demand — both household spending and business investment — has strengthened “substantially more than expected”, while capacity in the economy remains constrained.

Housing activity and prices are continuing to rise, credit remains readily available, and the impact of earlier rate cuts has not yet fully flowed through to prices and wages. Financial conditions, the Board noted, may no longer be restrictive.

At the same time, the labour market has remained tight. Unemployment has come in lower than forecast, underutilisation remains low, and while headline wage growth has eased slightly, broader wage measures and unit labour costs are still elevated.

Together, these trends point to an economy where too much demand is chasing too little supply, a problem the RBA has repeatedly warned cannot be solved by monetary policy alone.

A failure of fiscal discipline

Economists and market analysts say today’s decision highlights a growing disconnect between the RBA’s inflation-fighting mandate and the federal government’s economic settings.

While the central bank has tightened policy to cool demand, Commonwealth fiscal policy has remained expansionary, with large structural spending commitments, cost-of-living relief measures that stimulate consumption, and no meaningful attempt to offset demand through savings or tax reform.

Housing supply remains constrained, yet population growth — driven by record migration levels — has continued at a pace that outstrips infrastructure and dwelling construction. The result has been rising rents, upward pressure on wages, and renewed inflation persistence.

The RBA was explicit that capacity pressures reflect “greater momentum in demand” combined with limited growth in supply. That combination, critics argue, is the direct consequence of policy choices made in Canberra.

Monetary policy left to do the heavy lifting

The central bank has repeatedly stressed that interest rates are a blunt tool. Yet, in the absence of coordinated fiscal restraint, the burden of inflation control has once again fallen on households with mortgages.

The RBA noted that credit remains easily accessible and that earlier rate reductions are still working their way through the economy, meaning inflation risks remain skewed to the upside.

With government bond yields, money-market rates, and the exchange rate already rising on expectations of tighter policy, today’s rate hike reinforces a message that rates may stay higher for longer, or rise further, if demand does not slow.

Global conditions no longer a brake

While global uncertainty remains elevated, the RBA said international developments have so far had “little or no depressing effect” on Australia’s economy. In fact, growth and trade in major partner economies have surprised on the upside.

This removes another potential source of disinflation that policymakers had hoped might ease domestic pressures.

In other words, Australia cannot rely on global weakness to do the work that domestic policy has failed to do.

What this means for households

For borrowers, the decision translates into immediate pressure on already stretched budgets. Mortgage repayments will rise at a time when rents, insurance, energy and food costs remain high.

The RBA acknowledged uncertainty about how restrictive policy currently is — a signal that the bank itself is not convinced rates have yet done enough to bring inflation decisively back to target.

For renters, the outlook is a little better. Strong demand, limited housing supply and population growth continue to push rents higher, feeding directly into the inflation the RBA is now trying to suppress.

A warning shot to Canberra

The central bank’s statement reads as a warning as much as a policy explanation.

Inflation has re-accelerated. Capacity constraints remain binding. Demand is too strong. And without changes to fiscal and structural policy, interest rates will remain the primary lever — regardless of the political cost.

The RBA reiterated that it will “do what it considers necessary” to deliver price stability and full employment, signalling it will not hesitate to act again if inflation fails to moderate.

That leaves a stark reality: unless the federal government moves to curb demand, expand supply and show fiscal restraint, households will continue to pay the price through higher interest rates.

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