The Reserve Bank of Australia (RBA) has decided to increase the official cash rate (OCR) by 25 basis points to 3.85%. The unanimous decision was driven by increased inflation.

“While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” read a statement from the RBA. “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.”

“High inflation hurts all Australians,” RBA Governor Michele Bullock told reporters during Tuesday afternoon’s press conference.

She added that the board’s decision “is not the news that Australians with mortgages want to hear. But it is the right thing for the economy.”

All of Australia was holding its breath this afternoon as the RBA finished off its two-day meeting on monetary policy, the first for 2026.

Even with three rate cuts in 2025 – which brought the official cash rate (OCR) down to 3.6% – mortgage holders and investors were still hoping for extra relief as cost-of-living pressures mount and property process keep climbing.

But stubborn inflationary pressures and relatively low unemployment has been difficult for the nation’s central bank to ignore.

The RBA has been clear that it would not keep cutting rates until inflation was back within the 2% to 3% target band. But when prices began climbing unexpectedly last spring, markets — including some of Australia’s major banks — started to question whether the next move could be a hike.

The latest Consumer price index (CPI) showed inflation is far from easing, reinforcing the view that rates were more likely to rise than fall.

Both headline CPI and trimmed mean inflation were up in the 12 months leading up to December. Headline CPI rose 3.8%, up from 3.4% in November, while trimmed mean inflation jumped to 3.4% during the same time period, compared with a 3% increase in the 12 months leading to November 2025.

Meanwhile, the nation’s labor market remains tight, falling to 4.1% in December and adding pressure to the RBA to consider a rate hike.

Consumer spending hasn’t taken a  back seat either, showing that Australians are still spending despite higher prices, and adding fuel to the argument that inflation isn’t showing signs of slowing down anytime soon. Household spending jumped 1%, month-over-month, to a record $79.35 billion in November, on a seasonally adjusted basis, according to the Australian Bureau of Statistics’ (ABS) Monthly Household Spending Indicator. That’s an increase of 6.3% in the year.

“That [increase] would make the RBA a bit more nervous that inflation would be elevated for longer and so would force them to increase rates to kind of cool the economy a little bit,” Ashwin Clarke, senior economist at Commonwealth Bank of Australia (CBA) said. “The faster the economy grows, the more likely it is to breach its speed limit and may cause inflation to increase.

The results rattled markets, prompting investors and mortgage holders to rethink not just rate holds, but the growing possibility of a rate hike. Australia’s Big Four banks, however, were firmly in the hike camp.