The Reserve Bank of Australia’s board concluded at its February meeting that planned monetary tightening was necessary to prevent inflation from remaining elevated, but members also emphasised that they do not yet have a defined path for future rate moves.
Minutes released following the meeting state that board members believed the risks to both the inflation and employment mandates had "shifted materially," strengthening the rationale for a policy response. In light of recent data, the board unanimously decided to lift the cash rate by 25 basis points to 3.85% - a move that reverses one of the three cuts implemented in 2025.
According to the minutes, "Members agreed that the data received since the previous meeting had strengthened their concern that, without a policy response, inflation would remain persistently above target for too long." The board also noted it lacked confidence in any single projected path for the cash rate, saying the prevailing uncertainties made it "not possible to have a high degree of confidence in any particular path for the cash rate."
Markets are pricing the possibility that inflation will prove stubborn enough this quarter to prompt another increase, with futures implying a move to 4.10% at the May meeting. Consumer price statistics for the first quarter are due in late April; analysts expect core inflation to remain around 3.4%, well above the RBA's 2-3% target range. The bank itself projects core inflation of 3.7% by mid-year and 3.2% by Christmas.
The minutes describe a balance of upside and downside risks to both inflation and economic activity, and they make clear the bank will rely on incoming data to guide subsequent decisions. While some of the recent inflation uptick may be temporary, the board observed that the rise in prices has been broad-based and could persist in the absence of tighter policy.
Domestic demand surprised on the upside, the minutes noted, and rapid increases in house prices and mortgage lending indicate financial conditions may be looser than previously assumed. On the labour market, unemployment fell to 4.1% in December, a development the board judged had reduced downside risks to employment.
Internationally, the minutes said the global economy has been more resilient to U.S. tariffs than expected, in part because of strong investment tied to artificial intelligence and related data centre builds. The recent appreciation of the Australian dollar could, if sustained, act to tighten financial conditions somewhat; the board observed that part of this currency strength reflected expectations of higher interest rates.
In sum, the RBA’s minutes portray a policymaking body responding to unexpected strength in domestic demand and a broader-than-anticipated rise in inflation, taking action now while reserving judgement on whether further hikes will be necessary. The board will look to the data due in the coming weeks, including the April consumer price release, to assess whether the tightening cycle must continue.
Summary
The RBA raised the cash rate by 25 basis points to 3.85% in February after concluding inflation would remain elevated without policy action. Minutes indicate uncertainty about the need for further rate increases, with the bank awaiting incoming data, including first-quarter consumer prices due in late April.
Key points
- Board saw risks to inflation and employment as having "shifted materially," prompting a unanimous 25 basis point hike to 3.85%.
- Markets expect a potential further rise to 4.10% in May if inflation proves persistent; RBA forecasts core inflation at 3.7% mid-year and 3.2% by Christmas.
- Stronger domestic demand, rising house prices and mortgage lending, and a tight labour market (unemployment 4.1% in December) influenced the board's assessment.
Risks and uncertainties
- Inflation may remain ‘‘persistently above target’’, which could force more policy tightening - impacting fixed income and mortgage-sensitive sectors.
- Financial conditions could be looser than assumed due to rapid house price and credit growth, potentially affecting the housing market and bank lending dynamics.
- Exchange rate movements - a sustained rise in the Australian dollar - could tighten conditions and alter export and import price dynamics.