Reserve Bank of Australia Governor Michele Bullock on Tuesday explained why the central bank raised the Official Cash Rate by 25 basis points to 3.85% after the February policy meeting, and took questions under the RBA’s newer press format. The board’s decision was announced at 03:30 GMT and followed by Bullock’s press session; markets responded quickly, with AUD/USD retaking the 0.7000 area and trading about 0.75% higher on the day. Bullock said the recent strength in inflation motivated the move and that the board will remain data-driven and cautious on future settings. The RBA also published updated forecasts that push the assumed cash-rate path higher through 2026 and 2027.
Key Takeaways
- The RBA raised the Official Cash Rate by 25 bps to 3.85% (from 3.60%) at the February meeting; the decision was unanimous.
- The board judged inflation had picked up materially in the second half of 2025 and is likely to remain above target for some time.
- RBA forecasts assume a cash rate of about 3.9% by June 2026 and 4.2% by December 2026, with inflation projections raised out to end-2027.
- Trimmed-mean inflation is forecast at 3.7% in Q2 2026 and 3.2% by Q4 2026; CPI is projected at 4.2% in Q2 2026 and 3.6% by Q4 2026.
- Labour market remains tight: recent ABS data showed unemployment at 4.1% and net employment rose by 65.2k in December 2025.
- RBA noted stronger-than-expected private demand, sharper credit growth and higher business investment forecasts, partly driven by data-centre projects.
- Governor Bullock said the board did not discuss a 50 bps move and will monitor incoming data closely; she warned the inflation pulse is “too strong.”
- The Australian dollar strengthened immediately after the announcement, with AUD/USD moving back above 0.7000.
Background
Inflation in Australia peaked in 2022 then moderated, but the RBA assessed that price pressures picked up again materially in the second half of 2025. That unexpected pick-up—across both household spending and some sector-specific pockets—prompted the board to reconsider the stance of policy. The RBA has been operating in a global backdrop where many central banks began easing, but domestic data signalled a different path for Australia.
Under a reporting change implemented last year, Governor Bullock now fields questions at a formal press conference after the Monetary Policy Statement, a format intended to improve transparency around deliberations. Ahead of the February meeting, hotter-than-expected CPI and labour-market reads had already lifted market odds of a February hike and prompted major Australian banks to flip toward expecting a quarter-point rise.
Main Event
At 03:30 GMT the RBA announced a 25 bps increase in the Official Cash Rate to 3.85%, describing the decision as unanimous. The Monetary Policy Statement that accompanied the decision cited stronger private demand, sharper credit growth and greater capacity pressures than previously judged. The board explicitly judged the economy to be growing above potential and said that the cash rate should be increased to restore balance between demand and supply.
Governor Bullock told reporters the inflation pulse had been stronger than anticipated and that the board could not let inflation “get away” from its mandate. She said the board did not discuss a 50 bps rise and emphasized a cautious, data-dependent approach: the board will be “very actively monitoring data” and its decisions will be guided by the evolving outlook and risks.
On the exchange-rate channel, Bullock noted that some tightening in financial conditions has already occurred via a stronger Australian dollar and that a rising AUD is “helpful at the margin.” She stopped short of calling the episode the start of a sustained tightening cycle and said the board could not rule anything in or out, underlining uncertainty about how restrictive policy currently is.
Analysis & Implications
The RBA’s move and forecasts signal a central bank prepared to diverge from the global easing trend if domestic conditions warrant it. By lifting the assumed cash-rate path (3.9% by June, 4.2% by December), the RBA is indicating it sees upside risks to inflation and expects to use policy rates to rebalance demand and supply. That forward path raises the probability of at least one or two more quarter-point adjustments if incoming data keep surprising on the upside.
For households and businesses, the projected higher-for-longer rates mean mortgage servicing costs are likely to remain elevated, slowing discretionary spending and weighing on interest-rate sensitive sectors such as housing. At the same time, the RBA’s upgraded forecasts for business investment—driven partly by large data-centre projects—create asymmetric demand pockets that may support growth even as consumer activity softens.
Financial conditions have already tightened in part through currency appreciation, which provides some offset to the need for additional rate increases by reducing import-price pressures. But the RBA warned that indicators of financial accommodation remain in some measures, and that total credit growth has picked up sharply; those dynamics complicate the outlook for inflation persistence.
Comparison & Data
| Measure | Latest | RBA Forecast Jun 2026 | RBA Forecast Dec 2026 | RBA Forecast Dec 2027 |
|---|---|---|---|---|
| Cash rate (OCR) | 3.85% | 3.9% | 4.2% | — |
| Headline CPI (year) | 3.8% (Dec 2025) | 4.2% (Q2 2026) | 3.6% (Q4 2026) | 2.7% (Q4 2027) |
| Trimmed-mean CPI | 0.9% q/q Q4 2025 | 3.7% (Q2 2026) | 3.2% (Q4 2026) | 2.7% (Q4 2027) |
| Unemployment rate | 4.1% (Dec 2025) | — | 4.3% (Q4 2026) | 4.5% (Q4 2027) |
The table highlights the upward shift in the RBA’s central projections relative to recent readings. RBA staff now see inflation moving higher in early-to-mid 2026 before easing toward the 2–3% target by late 2027, contingent on policy and demand adjustments. The assumed cash-rate path is higher than market pricing prior to the announcement, which explains the immediate strengthening of the AUD and repricing in money markets.
Reactions & Quotes
Below are representative reactions and context from official and market sources.
“The inflation pulse is too strong, and we cannot allow inflation to get away from us again,”
Michele Bullock, Governor, Reserve Bank of Australia (press conference)
Context: Bullock used the phrasing to justify the unanimous 25 bps move and to signal that the board is prepared to act if inflation signals do not moderate. She stressed the board had not considered a 50 bps step and would remain data dependent.
“Some measures of financial conditions remain somewhat accommodative despite the cash rate being higher,”
RBA Monetary Policy Statement (official)
Context: This language accompanied the forecasts and underpinned the RBA’s case that further policy tightening may be warranted to restore balance between demand and supply.
“AUD/USD has the potential to resume an uptrend toward 0.7050 on a hawkish signal, but could test 0.6900 on disappointment,”
Dhwani Mehta, FXStreet Asian Session Lead Analyst
Context: FXStreet’s in-house technical view explained the immediate market reaction—AUD strength on the hike and upgraded path—while noting clear downside levels if the RBA signals a less aggressive follow-through.
Unconfirmed
- Whether this February move begins a sustained tightening cycle remains unconfirmed and depends on incoming inflation and labour-market data.
- The persistence of the stronger private-demand impulse—especially the elevated business investment forecasts linked to specific projects—is uncertain.
- Market pricing for the full June–December 2026 cash-rate path may still adjust as new data arrive; current RBA assumptions are subject to revision.
Bottom Line
The RBA’s 25 bps hike to 3.85% and the accompanying forecasts mark a clear re-assessment: inflation momentum has returned and the board is prepared to raise rates further if required. Governor Bullock balanced that message with caution, saying the board did not discuss larger moves and will watch incoming data closely.
Financial markets reacted quickly, lifting the AUD and repricing short-term rate expectations; households and businesses should expect higher borrowing costs for longer if the RBA’s forecasts prove accurate. Ultimately, whether the RBA tightens further hinges on the durability of private demand, the labour market and whether inflation readings continue to surprise on the upside.