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Australia’s central bank has lifted interest rates for the first time since 2023, one of the first big economies to tighten its monetary policy, in an effort to combat inflation.

Central bankers increased rates by 25 basis points to 3.85 per cent on Tuesday, with the board unanimous in its decision to reverse a cut six months ago. The Australian dollar rose 0.8 per cent against the US dollar.

“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,” the Reserve Bank of Australia 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.”

Jim Chalmers, Australia’s treasurer, said that the rate rise would increase pressure on mortgage holders and businesses.

“This will be difficult news for millions of Australians,” he said in an address to parliament. He dismissed opposition criticism that government spending under his Labor government had contributed to the central bank’s decision to raise borrowing costs.

The RBA had been tipped to lift the lending rate after data released last week showed that the inflation rate had risen to 3.8 per cent, up from 3.4 per cent, in the 12 months to December, due to higher costs in housing, food and tourism. 

The “trimmed mean” inflation rate, the RBA’s preferred measure which excludes volatile items, was 3.3 per cent. The central bank has targeted a range of 2 to 3 per cent.

Australia last raised interest rates in November 2023 and applied three cuts in 2025.

Economists remain divided on whether the rate rise will be a blip or if it signals a return to a tightening cycle in 2026.

Thousands of tourists had travelled to Australia over December and January for the Ashes cricket test, buoying prices ahead of the February meeting, analysts said. A stronger Australian dollar may also deter the central bank from tightening further, analysts said.

Given the market had previously factored in up to three rate cuts this year, Matt Bell, an economist with property services firm Oliver Hume, “many now expect a period of wait-and-see”.