RBA raises rates for first time in two years, AUD jumps

The Reserve Bank of Australia (RBA) has raised interest rates for the first time since November 2023, raising the cash rate by 25 basis points to 3.85% in a unanimous decision reflecting growing concern about persistent inflationary pressures.

The decision marked a sharp reversal from the August 2025 rate cut, with the Board concluding that “the rate was no longer at an adequate level to return inflation to the target within a reasonable time frame.»

This was emphasized by the Central Bank inflationary pressures accelerated in the second half of 2025driven by higher-than-expected private demand for both consumption and investment, as well as tighter capacity constraints.

Key conclusions

• RBA raised the cash rate to 3.85%reversing one of the three cuts it made in 2025 and becoming the first major central bank in the world to switch from easing to tightening
• Inflation increased significantly in the second half of 2025, private demand is growing faster than expected and pressure on capacity is greater than previously estimated
• Governor Michelle Bullock emphasized that the economy is limited by supply inflation will remain higher than the target of 2-3% for some time.although she stopped short of making further treks in advance
• Updated forecasts suggest the cash rate will rise to 3.9% by June and to 4.2% by December, given approximately two additional increases in 2026

Link to Reserve Bank of Australia Monetary Policy Statement (January 2026)

At her press conference, RBA Governor Bulak admitted that borrowers would be “disappointed” but warned that allowing inflation to remain high would be worse. She defended the August rate cut, noting that circumstances had changed significantly since mid-2025, when demand was weak and inflation appeared to be on target.

Bullock stressed that the RBA’s strategy has not changed fundamentally – the board remains committed to reducing inflation while maintaining gains in the labor market – but stressed that the economy is “even a bit tighter than we thought”.

Link to RBA Governor Bullock’s press conference (January 2026)

The updated Monetary Policy Statement showed much higher inflation forecasts, with core inflation expected to reach 3.2% by the end of 2026, up from the November forecast of 2.7%, and not return to an average of 2.5% until mid-2028.

This upward revision came despite the forecast for further rate hikes, underscoring the Council’s concerns about the pace of inflation.

Market reactions

Australian Dollar vs Major Currencies: 5 min

The Aussie dollar retreated early in the Asian session before rebounding sharply on the back of the RBA’s rate hike. AUD/USD led the movement, jumping around 1% and well above the psychological level of 0.7000.

The unanimous nature of the decision, with no dissenting votes, reinforced the view that the RBA is serious about getting inflation under control, even if it means higher borrowing costs for households.

Swaps markets wasted no time in revising their outlook, moving away from expectations of further easing and to a roughly two-thirds chance of another rate hike by June, with a possible next move in August.

The Australian gave back some of its gains after the announcement about 30 minutes after the announcement and briefly dipped after Governor Bullock’s press conference. However, comdoll quickly found its footing and remained comfortably above the level until the event when trading moved into the London session.

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