As widely predicted by markets, the Reserve Bank of Australia hiked the cash rate to 3.85 per cent on Tuesday afternoon. 

 

The board’s decision was unanimous, marking its first increase since November 2023.

 

RBA governor Michele Bullock defended the move, saying the board was determined to bring inflation back under control after price pressures again moved in the wrong direction. 

 

“It’s not a science, it’s a bit of an art, and there are so many things that can push us off course,” Bullock says, acknowledging the difficulty of steering the economy back to the Reserve Bank’s 2-3 per cent inflation target.

 

Westpac Chief Economist Luci Ellis says the February hike reflects a change in economic conditions over recent months. 

 

While rate cuts were still relatively widely discussed late last year, inflation has since picked up again. Stronger consumer spending and a pause in the earlier gradual softening in labour market conditions suggest that it could stay higher for a while. 

 

“There are just too many prices running faster than they were a year ago,” says Ellis.

 

With unemployment holding low and spending looking resilient, the RBA is concerned inflation could stay higher for longer without tighter policy.

 

For households, higher rates mean borrowing becomes more expensive - and relief is unlikely to arrive quickly.   

 

Ellis says the central bank’s forecasts show inflation staying elevated for a while yet, coupled with a deliberate slowing in economic growth. 

 

That combination suggests policymakers are prepared to tolerate more pain now to restore stability later. 

 

The housing market is one of the areas most directly affected. 

 

Higher interest rates are designed to cool demand, and Westpac’s chief economist expects recent momentum in prices and construction to soften from here. 

 

While direct price falls are not expected, the pace of growth is likely to slow as borrowing power declines. 

 

Population growth and tight rental conditions are still supporting housing demand, particularly outside Australia’s two largest cities.

 

The additional challenge and strain of higher mortgage repayments and living costs is readily acknowledged by Bullock.

 

“It’s not the news that Australians with mortgages want to hear,” she says, “but it is the right thing for the economy.” 

 

Erring on the side of caution, Bullock believes allowing inflation to linger would ultimately be more damaging, “I understand it is hard, but the alternative is even harder.”