The Reserve Bank of Australia (RBA) board has unanimously decided to raise the cash rate target by 25 basis points to 3.85 per cent, with economists raising concern for households and small businesses.
In a statement, the RBA pointed to the material uplift in inflation in the second half of 2025, and believes that some of the increase here reflects greater capacity pressures. As a result, the board considered that inflation is likely to remain above target for some time.
Capacity pressures reflect, in part, the greater momentum in demand seen in recent months,” the RBA explained.
“Growth in private demand has strengthened substantially more than expected, driven by both household spending and investment. Activity and prices in the housing market are also continuing to pick up. Financial conditions eased over 2025 and it is uncertain whether they remain restrictive. Credit is readily available to both households and businesses and the effects of earlier interest rate reductions are yet to flow through fully to aggregate demand, prices and wages. More recently, the exchange rate, money market interest rates and government bond yields have risen following a rise in market expectations for the cash rate.”
On top of this, various indicators indicate 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 added that the unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates.
Looking ahead, the RBA pointed to a few uncertainties for domestic economic activity and inflation, “and the extent to which monetary policy is restrictive.”
“On the domestic side, if growth in demand is stronger than expected, and growth in the economy’s supply capacity remains limited, it is likely to add further to capacity pressures,” the RBA noted. “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.”
In response to the bump-up, the Australian Retail Council (ARC) CEO Chris Rodwell said it will weaken business and consumer confidence, and slow the retail recovery.
"Retail is a $444 billion sector which contributes almost one fifth of our gross domestic product and employs one in ten Australians – we need retail to thrive for our broader economy to thrive," Rodwell said.
"Retailers have spent the past three years managing rising costs and navigating aggressive global competition and ongoing uncertainty. This rate rise places additional pressure on business investment and household budgets.
"Today’s decision underlines the need to lift productivity across the economy. That means governments must move faster to reduce unnecessary red tape, cut duplication across jurisdictions, lower the compliance burden on businesses, and contain government spending.”
Meanwhile, CPA Australia thinks it will hit households and small businesses harder, too. Business and investment lead Gavan Ord said small businesses remain under pressure from high borrowing costs, rising inflation and low consumer confidence. “For many, there are no easy options left,” he said.
“What small businesses need most is decisive government action to reduce red tape and improve the overall business environment,” Ord said. “Removing unnecessary regulatory burden helps businesses focus on growing, employing people and serving customers.”
Ord added many small businesses will have little choice but to pass some of these costs onto customers. Others, he noted, will need to rethink investment and growth plans to manage cash flow and financial risk.
In making its decision, the RBA thinks it is evident that private demand is growing more quickly than expected, while capacity pressures are greater than previously assessed and labour market conditions remain a little tight.
The board wrapped up, saying it will focus on its mandate to deliver price stability and full employment, and will do “what it considers necessary” to achieve that outcome.