RBA interest rates: Michele Bullock’s board lifts cash rate to 3.85 per cent in fresh inflation fight

Australia’s cost of living crisis is set to rage for another year even after the Reserve Bank lifted interest rates on Tuesday and experts warned more hikes could follow. The RBA raised the official cash rate from 3.6 per cent to 3.85 per cent in a unanimous decision, which marked a clear reversal after three cuts through 2025. Borrowers with a $600,000 mortgage will pay $90 a month more, according to Canstar. Yet victory in the cost of living battle remains a distant hope, with fresh RBA forecasts showing inflation will remain above the 2 to 3 per cent target zone until June 2027. That would mean inflation in excess of the RBA’s target band almost every quarter for more than five years, starting from 2022. “The underlying pulse of inflation is too strong,” Governor Michelle Bullock said after the decision. “The cash rate was no longer at the right level to get inflation back to target in a reasonable time. “High inflation hurts all Australians. We can’t let inflation get away from us again.” BDO chief economist Anders Magnusson said the RBA was worried inflation would stick around long term. “This move marks a meaningful shift in the monetary policy cycle, suggesting further rises are coming, and the unanimous decision shows strong conviction by the board,” he said. Financial markets already predict another hike within the next six months. Ms Bullock would not be drawn as to whether the central bank would be raising rates further, labelling Tuesday’s move an “adjustment”. “I can’t say one way or the other now,” she said. But Commonwealth Bank was firmer and chief economist Belinda Allen declaring a hike in May line ball decision but likely. “Private demand is rising more briskly than they expected, particularly household spending,” she said. “The RBA judges financial conditions are looser than earlier thought given growth in credit, home prices and credit availability.” Not all economists were tipping another rate rise and AMP’s Shane Oliver expected a hold for the remainder of 2026. The good news for families is that the jobs market remains strong and unemployment is close to multi-decade lows at 4.1 per cent. The RBA’s decision will be a blow for Treasurer Jim Chalmers, however, who came under political pressure for overseeing rapid growth of government spending. Opposition leader Sussan Ley and shadow treasurer Ted O’Brien said the move was the “direct consequence of Labor’s addiction to spending, which has kept inflation higher for longer and left the RBA with no choice but to keep tightening”. While Ms Bullock was reluctant to take aim at Canberra, the RBA’s forecasts showed public spending adding to demand, even as private spending — business and households — was also increasing. Dr Chalmers hit back by claiming $114 billion in savings since the 2022 election. “We know many Australians are doing it tough which is why we continue to roll out responsible cost of living relief, including a further tax cut later this year and another one next year,” Dr Chalmers said. “At the same time we’re doing what we can to strengthen the budget and address our longstanding productivity challenge.” Economists including KPMG’s Brendan Rynne urged the Treasurer to do more and said the “RBA cannot be the only dog in this inflation fight”. “Government spending, which has been adding to aggregate demand at the margin, needs to also be reined in to help better balance the demand and supply pressures driving the current push up in inflation.” He said the RBA had “opted for a more aggressive approach to re-taming inflation” which would send a strong message to households and businesses to temper spending. The effect will be broader than just families paying off mortgages. Property consultants Cotality tipped the rate rise would take a little bit of heat out of the property market. “This rate hike is likely to reduce some of the demand side pressure,” head of research, Gerard Burg said. “(It) will reduce the borrowing capacity of buyers, with a median income household in Australia losing around $18,000 from their mortgage limit. “This could push an increasing number of buyers from mid-tier properties to lower quartile ones, leading to higher demand on the urban fringes and regional markets close to capital cities.” The Australian Dollar remained above US 70 cents after the announcement — easing prices for imports like electronics while making exporters less competitive.