By Jacob Shteyman in Canberra

The Reserve Bank has delivered a blow to borrowers with an interest rate hike, becoming the first major central bank to go from cuts to rises after the post-covid inflation spike.

In a unanimous decision on Tuesday, the RBA’s monetary policy board lifted the cash rate by 25 basis points to 3.85 per cent.

The move was tipped by most economists and expected by financial markets, which attributed a three-quarter chance of a rate rise ahead of the decision, after inflation surged back above the central bank’s two to three per cent target band.

Labour force data and consumer spending were also above Reserve Bank forecasts, heightening fears the economy was running above capacity and contributing to inflationary pressures.

A wide range of data showed inflationary pressures picked up “materially” in the second half of 2025, the board said in its accompanying statement.

“While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight,” it said.

“The board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.”

But the decision was a difficult one for the Reserve Bank after cutting interest rates as recently as August.

After bucking the trend of peer economies by intentionally keeping rates lower for longer to prevent a spike in unemployment, the RBA becomes the first major central bank to return to interest rate rises since the pandemic.

Some economists predicted it would prefer to wait for further data as recent monthly inflation data had been softening and strength in the Australian dollar would take some heat out of the economy.

Domain chief economist Nicola Powell said the hike would take some momentum out of the housing market as it reduced buyers’ borrowing power.

A borrower with a $600,000 mortgage would see their monthly repayments increase by about $90, assuming lenders pass on the increase in full.

Attention will turn to what tone RBA governor Michele Bullock strikes in her post-meeting press conference, with economists unsure about whether the hike will be followed by further rises.

In updated economic forecasts, central bank staff revised up their inflation assumptions, with core inflation expected to come in at 3.2 per cent by the end of 2026, up from a November prediction of 2.7 per cent.

The board said it would use upcoming data about the global economy, domestic demand, inflation and the labour market to guide future decisions.

Treasurer Jim Chalmers said the decision was widely expected, but that didn’t make it any easier for homeowners.

“This will be difficult news for millions of Australians with a mortgage and we understand the pressure that this will put on families and businesses,” he said.

Dr Chalmers was quick to point out the board statement did not mention government spending as a driver of inflation.

“It makes it very clear the pressure on inflation is coming from private demand,” he said.

But the Australian Chamber of Commerce and Industry urged governments to cut spending to take pressure off interest rates.

“The extraordinary growth in government spending has been contributing to three serious problems for business – higher inflation, higher interest rates and pressure for future tax increases,” the chamber’s David Alexander said.