Reserve Bank of Australia raises cash rate target to 3.85%

The Reserve Bank of Australia has increased its cash target.

The Reserve Bank of Australia has raised its cash rate target by 25 basis points to 3.85% – its first rate increase in more than two years.

The hike was widely expected.

The bank said that while inflation had fallen substantially since its peak in 2022, it 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,” it said.

“As a result, the board considers that inflation is likely to remain above target for some time.”

The Reserve Bank of Australia (RBA) targets an annual Consumer Price Index (CPI) inflation rate of 2-3% on average, over the medium term.

The bank said capacity pressures reflect, in part, the greater momentum in demand seen in recent months.

Growth in private demand had strengthened substantially more than expected, driven by both household spending and investment, the RBA said.

Activity and prices in the housing market were also continuing to pick up.

“Various indicators suggest that labour market conditions remain a little tight and that they have stabilised in recent months, in line with the pick-up in momentum in economic activity,” the RBA said.

The unemployment rate had been a little lower than expected and measures of labour underutilisation remain at low rates.

“Uncertainty in the global economy remains significant but so far there has been little or no depressing effect on the Australian economy; indeed, recent growth and trade in Australia’s major trading partners has surprised on the upside.”

The RBA’s cash rate compares with New Zealand’s Official Cash Rate of 2.25%.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.

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