Last Tuesday's decision by the RBA board was its first rate hike in two years, lifting the cash rate by 0.25 per cent to 3.85 per cent to where it was in mid-2025 when inflation began to come down.

Now inflation is picking up again, the RBA's governor said it must stem economic pressures to bring price hikes back within its preferred range by 2027.

In the first press conference of the year, and following the bank’s decision to raise interest rates to 3.65 per cent, Bullock said the board now believes it will take longer for inflation to return to target.

While the increase may seem marginal to some, a Roy Morgan poll showed it could spell mortgage stress for 1.3 million households.

Mortgage stress is generally defined as a situation in which a household spends 30 per cent or more of its pre-tax income on home loan repayments.

Australia's inflation rate rose to 3.8 per cent in the 12 months to December 2025, which was well above expectations.

The RBA's latest forecasts don't have inflation back to within its targets until 2027, but that includes going ahead with two rate hikes.

RBA governor Michele Bullock said at her press conference after the increase she was not predicting there'll be more rate rises.

"But I'm also not saying that if inflation does remain too high, there mightn't be," Ms Bullock said.

"The outlook for inflation depends not just on the inflation number today, but on the strength in demand and whether the economy has the capacity to meet that demand, and on global conditions as well."

Independent Federal MP for Indi Dr Helen Haines said those households already on tight budgets would be hit the hardest by the interest rate rises.

"So news of a RBA rate increase last week will cause concern for people who are already under substantial financial pressure," she said.

"It also heightens the government’s obligation to avoid imposing unnecessary pressure on the economy, while still delivering the essential services people depend on, such as aged care, disability and childcare.

"That responsibility should include tapping into unmet revenue opportunities - like the Petroleum Resource Rent Tax so Australia receives a fair return from resources that are extracted here and sold offshore."

In the official statement of the by the Monetary Policy Board (available at https://www.rba.gov.au/media-releases/2026/mr-26-03.html), the board pointed to capacity pressures that reflect, in part, the greater momentum in demand seen in recent months.

"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.

"Various indicators suggest 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 unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates.

"Growth in the Wage Price Index has eased from its peak, but broader measures of wages growth continue to be strong and growth in unit labour costs remains high.

"There are uncertainties about the outlook 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.

"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."