The Reserve Bank of Australia (RBA) has reaffirmed its determination to reduce inflation to its target range but refused to be drawn on the outlook for interest rates.
RBA Governor Michelle Bullock said she recognised the 25 basis point increase in the official cash rate announced on Tuesday “was not a great outcome for mortgage holders”.
“What’s also not good for them or anybody else is if inflation remains elevated,” she told a news conference.
“Ultimately, it is best if we get inflation under control, and our instrument is the interest rate, and I understand that people with mortgages find that hard, but the alternative is potentially even harder, so I empathise with them.”
The RBA remained focused on returning inflation to target and would continue to be driven by incoming data.
The RBA earlier raised the rate to 3.85% from 3.60% to reduce inflation, in a unanimous and widely expected decision at the two-day bi-monthly meeting of the RBA’s Monetary Policy Board.
The chances of an increase to 3.85% had been rated at 72% by the Australian Securities Exchange’s RBA rate tracker on Monday.
Bullock said although the rate hike had been portrayed negatively, the economy was “actually in a really good position” with a strong labour market and domestic demand recovering.
“These are good things, but it's just that we're supply constrained, and we think we're even a little more constrained than we thought back a little while ago,” she said.
“I'm not predicting there'll be more rate rises, but I'm also not saying that if inflation does remain too high that there might be, so I'm going back to that never ruling anything in or out phrase,” Bullock told reporters.
Earlier the Board said in a media release that while inflation had fallen substantially since its peak in 2022, it had picked up materially in the second half of 2025.
“The Board has been closely monitoring the economy and judges that some of the increase in inflation reflects greater capacity pressures. As a result, the Board considers that inflation is likely to remain above target for some time,” it said.
It also followed an increase in the inflation rate to 3.8% in the 12 months to the end of December from 3.4% a month earlier at the headline level and to 3.3% from 3.2% over the same period at the trimmed-mean, or underlying, level.
The Board said a wide range of data over recent months had confirmed that inflationary pressures picked up materially in the second half of 2025.
“While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight,” it said.
“The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target."
