In November 2025, we pondered whether the Reserve Bank of Australia (RBA) was finished with their easing cycle. On 3 February 2026, the RBA answered that question, with hotter-than-expected inflation forcing the Reserve Bank’s hand. In our February 2026 economic update, we look at the factors that have resulted in the RBA’s decision, and what the market is saying about the path ahead.
Elevated inflation forces the RBA’s hand
Australia’s consumer price index climbed 3.8% year-on-year in December 2025, higher than the forecast 3.6% and well outside the RBA’s 2% to 3% target range. Additionally, Australia’s underlying inflation was 3.3% over the year to 31 December 2025, a slight increase on the 3.2% November figure and the 3.2% forecast.
Subsequently, the RBA announced a 25 basis point increase to the cash rate at their 3 February 2026 Board Meeting. The cash rate now sits at 3.85%, reverting back to where it sat as recently as August 2025 and marking the first rate increase since November 2023.
Typically, the average timeframe between the last cut of an easing cycle and the first hike is 10 months. In this instance, it has been only six months since the RBA’s 12 August 2025 decision to lower the cash rate by 25 basis points to 3.6% and the 3 February 2026 decision to reverse course.
Importantly, it wasn’t a one-off spike to inflation that caused the RBA to increase the cash rate. Inflation picked up across the second half of 2025, with the December 2025 figures included. CPI, for example, hasn’t been within the RBA’s target range since July 2025.
In this month’s announcement, the RBA went a step further, noting ‘the Board considers that inflation is likely to remain above target for some time.’
Will there be further increases?
The RBA’s hawkish language around lingering inflation has caused three of the big four banks to forecast an additional hike this year. Commonwealth Bank, Westpac and NAB (who hasn’t changed its forecast since last year) are all of the opinion that inflation will not have moderated enough for the RBA’s liking, leading to a second 25 basis point rate rise in May 2026.
The sentiment of the big four also reflects the reality that ‘one and done’ rate increases are uncommon. However, an argument can be made that this month’s hike could be one of the exceptions. While inflation is above the RBA’s target range, it is not at the same extremes seen in 2022 and 2023 (where CPI reached a peak of 6.8%). This means that, should inflation moderate, monetary policy may not need to be as restrictive now as it was then.
Both underlying inflation and the consumer price index are expected to moderate over coming quarters, which may present a compelling case for no further increases should this eventuate. Of course, it is worth noting that forecasts often miss the mark.
Unemployment falls
While inflation was the headline driver of the RBA’s 3 February decision, Australia’s unemployment rate for December 2025 (4.1%) was conducive to a rate increase. The December figure was an improvement on the 4.3% November reading, and also marks the lowest unemployment rate since May 2025.
The fall in unemployment was a reversal from the December forecasts of an increase to 4.4%. The RBA even noted in their Monetary Policy Decision that this caught them off guard, stating the ‘unemployment rate has been a little lower than expected.’
Unemployment is forecast to rise over coming months, increasing to 4.3% by the end of the March 2026 quarter and 4.5% by the end of 2026.
Will housing demand be impacted by the RBA’s rate hike?
According to the Cotality Home Value Index, Australian home values increased 0.8% in January 2026, an acceleration on the seven-month low of 0.5% growth in December 2025.
Growth was headlined by Perth (2.0%), Brisbane (1.6%) and Adelaide (1.2%), with Sydney (0.2%) and Melbourne (0.1%) weighing on the headline figure.
While too early to tell, opinion on the impact of the RBA’s rate hike on home values is split. On the one hand, demand for housing may wane, with increased interest rates making home ownership even less affordable. For existing homeowners, modelling from Roy Morgan forecasts that the RBA’s 25 basis point rate increase will mean 25.3% of all mortgage holders are considered ‘at risk’ (where mortgage repayments are greater than a certain percentage of household income).
On the other hand, the demand / supply imbalance may persist due to the chronic undersupply of housing, particularly as Australia falls further behind National Housing Accord targets.
Regardless of which situation comes to fruition, Cotality notes that despite the housing market’s resilience, home value growth is expected to lose momentum across 2026.
Where home values are anticipated to experience a slowdown, approved building permits already have. Total dwelling approvals in Australia decreased 14.9% month-on-month in December 2025 to a four-month low of 15,542 units. Forecasts for the March quarter are anticipating a marginal 0.5% monthly uplift to approvals, increasing slightly across the remainder of 2026 and into 2027 as it stands.
Despite overall building permit approvals experiencing a sharp decrease, private house approvals rose 0.4% month-on-month to 9,487 in December 2025. This was off the back of a 0.8% gain the prior month, marking the first back-to-back months of growth since January and February 2025.
Global conditions remain a source of both opportunity and volatility
Globally, economic conditions entering 2026 remain resilient but uneven, shaped by forces such as slowing inflation, divergent monetary policy paths and persistent geopolitical tensions.
The International Monetary Fund’s January 2026 World Economic Outlook Update notes that global growth is projected at 3.3% in 2026, supported by robust technology investment, accommodative financial conditions and surprising private sector adaptability. Simultaneously though, trade tensions, fiscal strains and geopolitical unpredictability pose credible threats to this outlook.
The United States sits at the crossroads of these competing forces.
Trade policy remains a defining global risk, which is emanating primarily from the United States. Recent tariff regimes, some of which have been rolled back and others extended, continue to reshape global demand, supply chains and currency movements.
While certain US-imposed tariffs have only had modest short-term impacts on inflation, they have weighed on import-heavy sectors and added to global uncertainty. Australia, like many economies, is not immune. Shifting dynamics between China and the United States, the erosion of longstanding trade predictability and ongoing tariff investigations continue to influence global growth forecasts and investor sentiment.
The RBA itself has warned that while global activity has held up, elevated uncertainty in global trade policy remains a key risk that will increasingly test the resilience of economies such as Australia.
The global picture, therefore, is one of cautious momentum. The United States economy remains a critical driver of global financial conditions, and any deviation from its current path would flow through to Australia, whether this is through monetary policy surprises, renewed tariff escalation or political uncertainty.
As it stands, stronger-than-expected global growth, easing inflation abroad and stable financial conditions provide a buffer. However, as the world continues to adapt to higher-for-longer policy rates, lingering trade tensions and shifting technological investment cycles, Australia’s external backdrop is likely to remain a source of both opportunity and volatility throughout 2026.
Overall, Australia enters 2026 navigating a finely balanced economic landscape, with domestic inflation pressures, a tight labour market and persistent housing challenges unfolding against a backdrop of shifting global conditions. While resilience remains evident, both at home and abroad, the year ahead is likely to test that strength as policymakers, businesses and households adapt to an environment defined by uncertainty, adjustment and cautious optimism.
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