RBA Shocks with First Hike of 2026: Official Cash Rate Hits 3.85%

The Reserve Bank of Australia (RBA) has broken ranks with the global pivot toward monetary easing, announcing a 25 basis point rate hike on Tuesday that lifts the Official Cash Rate (OCR) to 3.85%.

This decision, the central banks first policy move of 2026, underscores the persistent inflationary pressures gripping the Australian economy, even as peers like the Federal Reserve signal potential accommodation.

Inflation and Labor Markets Force Hand

Governor Michele Bullocks board noted that demand momentum and capacity constraints are re-igniting price pressures. Key data points driving the hawkish turn included:

• CPI Acceleration: December headline inflation hit 3.8% y/y (vs 3.6% expected).
• Core Pressures: Underlying inflation rose 0.9% in Q4, signaling that service sector and housing costs remain entrenched.
• Labor Resilience: The unemployment rate unexpectedly dipped to 4.1% in December, with net employment surging by over 65,000, defying expectations of a slowdown.

The RBA stated that further tightening was necessary to prevent inflation from becoming structurally embedded above the target band.

Market Reaction: AUD Rally

Foreign exchange markets reacted swiftly to the hawkish surprise. The Australian Dollar (AUD) became the day's top performer among G10 currencies.

• AUD/JPY: Climbed sharply above 108.50, driven by the widening yield differential between the RBA and the ultra-loose Bank of Japan.
• AUD/NZD: Jumped to near 1.1630, highlighting the divergence in trans-Tasman monetary policy outlooks.

Analysts suggest that the RBA's move complicates trade for those betting on a synchronized global easing cycle in 2026, putting a premium back on the Aussie dollar as a yield play.