Australia: February RBA Council Review

■ The RBA raised its policy rate to 3.85% at its February meeting and emphasized its vigilance against rising inflation.  

■ Financial markets have increased their expectations for further interest rate hikes in Australia, but the prospect of an economic slowdown beyond the second half of 2026 also warrants attention. 
 
   The Reserve Bank of Australia (RBA) held a board meeting on February 2-3 and decided to raise the policy rate to 3.85%. The last adjustment to the policy rate was in August last year, when it was cut (from 3.85% to 3.60%); the last rate hike dates back to November 2023 (from 4.10% to 4.35%). Before the meeting, market expectations were divided on whether to maintain the policy rate at 3.60% or raise it by 25 basis points. However, given its vigilance regarding the current risks of overheating in the Australian economy and inflation, the RBA clearly stated that it would prioritize curbing inflation in the short term. 
 
   The RBA's statement, the quarterly Financial Policy Report (FPR), and Governor Bullock's press conference are closely watched for insights into the future policy stance. The statement mentioned a "significant increase in inflation in the second half of 2025," a significant revision from the council's assessment in December of last year. Given Australia's revision of its monthly Consumer Price Index (CPI) since November of last year, it was initially expected that the RBA would be more cautious in its assessment of inflation risks. However, the SMP also explicitly pointed out that the private demand growth previously mentioned by the RBA in the second half of 2025 was actually much stronger than expected. This included strong household income growth, unexpected increases in housing prices and investment, as well as accelerated investment in data centers. In the June 2026 inflation forecast, the year-on-year CPI growth rate was revised upward from 3.7% to 4.2%, while the core inflation indicator monitored by the RBA—the trimmed mean inflation rate—was also revised upward from 3.2% to 3.7%, significantly higher than the RBA's target range of 2–3%. The RBA believes that, against the backdrop of strong expansion in private demand and tightening supply capacity, there is a risk of overheating in the economy in the short term. 
 
   Governor Bullock stated at a press conference that a cautious approach would be taken towards further interest rate hikes, but also noted that high inflation was "beyond expectations." Upward expectations for Australian interest rates remain strong; at the time of writing, the Australian short-term financial market has priced in an approximately 80% probability of another rate hike in May. In the government bond market, the 3-year yield is approaching 4.5%, the highest level since August 2011; the 10-year yield is also close to 5.0%, a high since July 2011. Against this backdrop, it is worth noting that the SMP's economic outlook shows a slight downward revision to growth expectations for the entire forecast period beyond the second half of 2026 (until June 2028). The RBA will focus on whether private demand growth and its resulting inflationary pressures are merely temporary; however, if financial conditions tighten more than expected, it is necessary to remain vigilant about the risk of a medium- to long-term economic slowdown. For the RBA, 2026 may be a challenging year for monetary policy operations.