The Reserve Bank has hiked rates for the first time in over two years, with mortgage holders to bear the brunt of dealing with an unexpected jump in inflation through the second half of 2025.

The RBA monetary policy board announced on Tuesday at the end of its two-day meeting that the cash rate target would lift to 3.85%, from 3.6%.

The widely anticipated decision marks the end of the shortest rate-cutting cycle in the RBA’s modern history, after three reductions in the cash rate target in February, May and August of last year.

The quarter of a percentage point increase will increase the interest cost on a $600,000 home loan by $90 a month, bringing the monthly repayment to $3782, according to Canstar.

Some experts leading into the decision warned that a rate hike would be an overreaction to the recent uptick in inflation and that it risked derailing an economic recovery.

Australia’s central bank has now shifted into a new phase, after rate cuts were interrupted by rapidly rising consumer prices.

The RBA said on Tuesday that inflation was likely to remain above target for some time and it was appropriate to increase the cash rate.

“A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025,” the RBA said.

“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 RBA’s economic outlook, contained in its monetary policy statement released on Tuesday, assumes headline inflation will now reach 4.2% by the middle of the year, a level far higher than previously expected.

If the forecasts prove correct, consumer price growth will also take longer to come down than previously thought, reigniting – or extending – the cost-of-living crisis.

Australians who are building their own homes are already seeing steep price rises, as growing demand allowed builders to remove discounts previously on offer. Durable goods, a category that includes furniture and large household appliances, are also recording fast price rises.

“These price pressures could prove to be temporary if growth in housing demand and consumption slows as anticipated, though this judgment is highly uncertain,” the RBA said.

Australia’s robust labour market, enduring household consumption, government spending and strong business investment has helped fuel rising prices.

At the same time, international pressure including Donald Trump’s tariffs have not hindered the global economy as much as once feared, reducing the need for further rate relief.

The RBA’s governor, Michele Bullock, will hold a press conference at 3.30pm.

Tuesday marks the first time the RBA has hiked rates since November 2023. The RBA’s rate-setting board said the decision to hike was unanimous.

VanEck head of investments and capital markets, Russel Chesler, said the central bank had no real choice but to “pull the trigger” and lift the cash rate.

“While the move was widely expected, it marks a clear escalation in the fight against inflation,” Chesler said.