By Shane Rodgers
Mortgage holders are facing more pain after the Reserve Bank decided to lift the cash rate a further 25 basis point to 4.1 percent.
The Reserve Bank Board was split on the decision with five members voting for the rise, and four members voting to leave the base interest rate unchanged at 3.85 percent.
The increase will be the second rise this year and came despite the Middle East war, signs that discretionary spending is already slowing and moderating inflation in most major economies.
In a statement, the Reserve Bank Board said that, while inflation had fallen substantially since its peak in 2022, it picked up “materially” in the second half of 2025.
“Information since the February meeting suggests that some of the increase in inflation reflects greater capacity pressures,” the statement said.
“In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation.
“Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.”
The Board conceded that financial conditions had tightened this year, but it said the extent to which monetary policy was curbing spending was uncertain.
The Board also noted:
- Growth in private demand strengthened substantially more than was expected in mid-2025.
- The composition of that growth was surprising in the December quarter. Business investment was above expectations and consumption was below expectations.
- More recently, the unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates.
- Activity and prices in the housing market grew strongly over the past year, although housing price growth moderated somewhat at the start of 2026.
The Board said developments in the Middle East remained highly uncertain, but a wide range of possible scenarios could add to global and domestic inflation.
“In light of these considerations, the Board judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside,” it said.
“It was therefore appropriate to increase the cash rate target.”
The CommBank Household Spending Insights (HSI) Index for February 2026, released last week, recorded the first spending fall since September 2024.
The bank described the latest index trend as a “significant shift” in behaviour.
OECD figures released last week showed year-on-year headline inflation had fallen in 22 of the 35 OECD countries in 2025.
Across the board, the annual CPI decreased to 3.3 percent in January 2026, from 3.6 percent in December 2025.
This compared with Australia’s January inflation rate of 3.8 percent, unchanged over the 12 months.
The full Reserve Bank statement is here.
