RBA shocks borrowers with surprise rate hike to 3.85%

The Reserve Bank of Australia (RBA) has delivered a surprise interest rate hike at its policy meeting this afternoon. The official cash rate was lifted by 25 basis points to 3.85%.

The decision was announced at 2:30pm, catching parts of the market off guard after many economists had expected the RBA to hold rates.

The move marks the first increase in the cash rate since 2023 and signals a renewed focus on inflation, despite signs of slowing economic growth.

Why did the RBA lift rates?

In its post-meeting statement, the RBA pointed to persistently high inflation as the key driver behind today’s decision.

While headline inflation has eased from its peak, the RBA noted that underlying price pressures remain stronger than previously forecast. Services inflation in particular continues to run hot, supported by a tight labour market and resilient consumer demand.

The RBA warned that inflation is expected to remain materially above the 2% to 3% target band for longer. This prompted the Board to act pre-emptively to prevent inflation expectations becoming entrenched.

Governor Michele Bullock acknowledged that higher interest rates will place additional pressure on households, but argued that failing to act could ultimately require even more aggressive tightening later.

What does this mean for borrowers?

For mortgage holders, today’s decision is another hit to household budgets.

If banks pass on the full increase, a borrower with a $500,000 variable-rate mortgage could see repayments rise by roughly $80 per month. Larger loans will feel an even greater impact.

It also reinforces concerns that interest rates below 5% may not return anytime soon. That risk grows if inflation remains stickier than expected through 2026.

How did the share market react?

Australian shares dipped immediately following the announcement.

The S&P/ASX 200 Index (ASX: XJO) fell from 8,872 points to 8,846 points in the minutes after the RBA decision, as investors digested the implications of higher borrowing costs.

Despite the pullback, the benchmark index remains up around 0.8% for the day. This is being supported by strength earlier in the session across financials, resources, and energy stocks.

The relatively muted reaction suggests the market had partially priced in the risk of a rate hike.

What happens next?

Attention now turns to the RBA’s Statement on Monetary Policy, due later this week, which will provide updated forecasts for inflation, wages, and economic growth.

Markets will also be watching upcoming inflation and labour market data closely. If price pressures fail to ease as expected, today’s move may not be the last rate hike of this cycle.

The post RBA shocks borrowers with surprise rate hike to 3.85% appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.