RBA bares its teeth

The Reserve Bank has today bared its teeth by re-asserting its determination to bring down inflation. It has raised interest rates by 0.25% to 3.85%, after having last cut them only six months ago.

The reasons are clear.

The RBA noted that “growth in private demand has strengthened substantially more than expected” in recent months. Associated with this, “inflationary pressures picked up materially in the second half of 2025.”

While the RBA concedes that part of the pick-up in inflation likely reflects temporary factors, it judges that solid demand in the face of limited spare economic capacity is also playing an important role. Accordingly, it has judged a need to raise rates to slow demand and ease the capacity pressures on inflation.

Is one rate rise enough? Only time will tell. Notably, there’s little in the RBA’s statement signalling it feels one will be enough. Indeed, even with its economic forecasts incorporating the market expectation of one further rate hike this year, the RBA still expects near-term inflation pressures to remain firm, with another 0.9% increase in quarterly trimmed mean inflation expected in the March quarter of this year.

Underlying inflation is only expected to ease a little in the June quarter, resulting in an annual trimmed mean inflation rate of 3.7% at that time.

Much will depend on the degree to which temporary versus demand-led factors account for the recent pick-up in inflation. The lift in new dwelling and consumer durable prices, for example, could reflect a one-off restoration in profit margins following an decrease during the earlier period of weak demand. Travel and hospitality costs, moreover, could have been temporarily boosted by one-off special events such as the Ashes cricket test series.

If it turns out that temporary factors have played a greater role than the RBA currently assesses, inflation may drop by more than the RBA expects in coming months, and this may well be a case of ‘one and done’. This is currently my base case expectation – namely a greater slowing in underlying inflation in the March quarter, removing the pressure on the RBA to raises rates in May.

However, at this stage, it’s hard to avoid the conclusion that the RBA has at least one more rate hike in mind, consistent with current market pricing. That’s because even under this scenario, inflation is expected to remain uncomfortably high for the foreseeable future.