The Reserve Bank of Australia surprised markets by raising its key interest rate by 25 basis points to 3.85% at a meeting on Tuesday, marking its first monetary tightening since November 2023 , amid clear acceleration in inflationary pressures.
The decision was in line with economists' expectations, after data showed inflation had reached its highest level in six consecutive quarters , prompting monetary policymakers to change course after three interest rate cuts implemented during 2025.
The central bank explained in its statement that private domestic demand is growing at a faster pace than expected , while pressures on production capacity and the labor market have become more acute, noting that the pace of inflation accelerated “significantly” during the second half of last year.
Australia's annual consumer price inflation hit 3.8% in December , up from 3.4% the previous month, driven mainly by higher housing costs and electricity bills following the end of government support programs.
In this context, Sani Nguyen , head of Australian economics at Moody's Analytics , said that inflation is likely to remain above the target range until late next year, before it begins to gradually decline.
She added that the resilience of the global economy and the momentum of Asian exports linked to the AI boom have mitigated the slowdown in domestic growth, but at the same time have hampered the process of "cooling down" an economy already suffering from a high degree of activity.
Reserve Bank of Australia officials continued to rule out an imminent interest rate cut, with Deputy Governor Andrew Hauser confirming that the chances of a cut were "very low" given the continued inflationary pressures, while Governor Michelle Bullock stressed that monetary policy decisions would remain dependent on the economic data for each meeting.
On the growth front, data showed that the Australian economy expanded by 2.1% in the third quarter , marking its fastest pace of growth in nearly two years, giving the central bank additional room to move towards tightening monetary policy.
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