Key Takeaways
- The Reserve Bank of Australia (RBA) raised its policy rate to 4.35 % on 9 December 2025 – the third straight increase and in line with market expectations.
- The decision passed 8‑1, with one member favouring a hold at 4.1 %.
- Rising inflation was chiefly attributed to Middle‑East conflict, which pushed up fuel and commodity prices and threatened second‑round price effects.
- The RBA now sees inflation staying above its 2‑3 % target for an extended period and signals further tightening; its forecast places the policy rate at 4.7 % by December 2026, the highest level since 2011.
- Inflation projections were lifted to 4.8 % for the June 2026 quarter and 4.0 % for the full 2026 year (up from 4.2 % and 3.6 % previously).
- Economic growth for 2026 was trimmed to 1.3 % from the earlier 1.8 % estimate.
- Analysts (e.g., ANZ, Capital Economics) describe the RBA’s tone as more hawkish than anticipated, with no clear pause in sight, though the board keeps its options open.
- Recent CPI data show persistent price pressures: 4.09 % YoY in Q1 2025 and a monthly peak of 4.6 % in March 2025, the highest since the monthly series began in 2025.
The Reserve Bank of Australia convened its December 2025 meeting amid a backdrop of stubborn inflation and geopolitical turbulence. Governor Michele Bullock announced that the policy rate would be lifted by 25 basis points to 4.35 %, matching the peak reached in December 2024. The move was widely anticipated; a Reuters poll of economists had forecast precisely this outcome, and the internal vote reflected strong consensus, with eight of the nine board members supporting the hike while one preferred to keep rates at 4.1 %.
In its statement, the RBA highlighted that inflation had picked up materially in the second half of 2025, driven largely by higher fuel and commodity prices stemming from the ongoing conflict in the Middle East. The bank noted that these developments were not only adding directly to inflation but also creating conditions for second‑round effects that could broaden price pressures across goods and services. Consequently, the RBA warned that inflation is likely to remain above its 2‑3 % target for some time, with risks judged to be elevated.
Looking forward, the RBA’s economic projections suggest a further tightening path. Its forecast now places the policy rate at 4.7 % by December 2026, which would be 50 basis points higher than the estimate made in early February 2025 and the highest level since December 2011. This outlook implies that additional rate hikes could be forthcoming if inflation data continue to surprise to the upside. The bank also revised its inflation forecasts upward: 4.8 % for the June 2026 quarter and 4.0 % for the full 2026 year, up from the previous figures of 4.2 % and 3.6 % respectively.
The central bank simultaneously trimmed its growth outlook for 2026, cutting the forecast for real GDP expansion from 1.8 % to 1.3 %. This downgrade reflects the anticipated drag from higher borrowing costs and persistent price pressures on household and business spending. Despite the slower growth trajectory, the RBA emphasized that its primary mandate remains price stability, and it will continue to monitor incoming data closely before deciding on any further policy adjustments.
Market analysts reacted swiftly to the announcement. ANZ Bank characterised the RBA’s tone as “more hawkish than we expected,” noting that the statement left little room for an imminent pause in June, although it stopped short of declaring another increase a foregone conclusion. Capital Economics’ senior APAC economist, Abhijit Surya, projected that the RBA would likely hike rates to 4.60 % in the third quarter of 2025, arguing that upside inflation surprises could justify further tightening.
The decision follows a series of inflation readings that have kept price pressures alive. Consumer prices rose 4.09 % year‑on‑year in the first quarter of 2025, the highest in more than two years, and monthly data showed inflation climbing to 4.6 % in March 2025—the peak since the RBA began publishing monthly CPI figures in 2025. In its March meeting, the bank had already warned that Middle‑East developments remained highly uncertain and could add to both global and domestic inflation under a range of scenarios.
Overall, the RBA’s December 2025 meeting signalled a commitment to confronting entrenched inflation through monetary tightening, while acknowledging the uncertain external environment. The board’s forward‑looking guidance points to a potentially higher policy rate trajectory, subdued growth prospects, and a continued dependence on evolving economic data to calibrate future moves.