Economy February 1, 2026

RBA Set to Lift Cash Rate by 25 bps, Outlook and Guidance Remain the Key Questions

Markets price a February hike to 3.85% as policymakers confront a late-2025 inflation rebound

By Sofia Navarro
RBA Set to Lift Cash Rate by 25 bps, Outlook and Guidance Remain the Key Questions

The Reserve Bank of Australia is widely anticipated to increase its cash rate by 25 basis points at the end of a two-day meeting on February 3, moving the benchmark to 3.85% from 3.60%. The expected move follows stronger-than-expected inflation readings driven by rising rents, food costs, a firm labour market and higher import prices. While a near-term hike is commonly priced in, analysts differ on how the RBA will frame its forward guidance.

Key Points

  • RBA widely expected to raise the cash rate by 25 basis points to 3.85% at the conclusion of its February 3 meeting.
  • Inflation pressures from rising rents, food prices, a firm labour market and higher import costs have driven market bets on a hike; central-bank guidance will be decisive for future policy expectations.
  • Markets are watching the AUD/USD and ASX 200 closely - the currency has already strengthened, while equities face downside risk from tighter policy and recent commodity price falls.

The Reserve Bank of Australia is broadly expected to raise its official cash rate by 25 basis points at the conclusion of a two-day policy meeting on February 3, which would lift the benchmark rate to 3.85% from 3.60%.

Market positioning for a February increase has been reinforced by a series of inflation readings through late-2025 that ran hotter than policymakers anticipated. Those prints reflected pressure from rising rents and higher food prices, while a comparatively strong labour market and elevated import costs added to the persistence of overall price growth.

Governor Michele Bullock has signalled that the central bank will not rule out any necessary action to return inflation to the RBA's 2% to 3% target band. That stance has left investors and traders skewed towards expecting a tightening move in the upcoming meeting, though the precise wording of the RBA's post-meeting guidance is a source of uncertainty.

Economists are split on how the bank will characterise its next steps. "With the other data finely balanced, though, the quarterly inflation print gets the casting vote," Westpac Chief Economist Luci Ellis wrote in a recent note. "After preparing the ground in recent weeks for a rate hike, we believe the RBA Monetary Policy Board will follow through on these warnings with a 0.25ppt increase in the cash rate to 3.85%."

Analysts at OCBC emphasised that the RBA's subsequent communication could swing the policy outlook. They said: "Provided that the central bank maintains its inflation trajectory - high in the first part of this year before gradually easing, it would then be a decision between a near-term hike as an insurance and no hike at all for most of the year." OCBC noted discussion within policy circles will likely focus on whether the recent pick-up in inflation is driven by constraints in domestic production capacity.


Currency markets have already reacted to the growing odds of an RBA rate increase. The Australian dollar strengthened on prospects of tighter policy, with the AUD/USD pair reaching its strongest level in nearly three years in January. Traders are watching the RBA's language closely - any explicitly hawkish cues from Governor Bullock about further tightening would likely provide additional support for the currency.

OCBC also pointed to broader fundamentals supporting the Australian dollar, noting that rising global commodity prices provide a favourable backdrop. On that basis, the bank revised its end-2026 AUD/USD forecast higher, to $0.73 from $0.69.


Domestic equity markets face competing forces as the RBA moves toward a likely increase. Higher interest rates typically put pressure on equities, and Australian stocks had declined on the prospect of tighter policy even though the ASX 200 logged an almost 2% gain in January. Any hawkish commentary in the RBA's statement or accompanying minutes could weigh on local stocks, while a softer-than-expected outlook might give shares room to rally.

Beyond monetary policy, Australian equities have recently been impacted by falls in commodity prices, particularly in gold and other precious metals, which hit the earnings outlook for resource-heavy segments of the market and contributed to recent negative moves.


In sum, a 25 basis point rise in the cash rate is widely forecast for the meeting ending on February 3, with central-bank commentary on the path of inflation and the role of domestic capacity constraints shaping market expectations for the rest of the year. The RBA's wording - whether it frames the action as an insurance move or as the start of a more extended tightening cycle - will be central to how currency, bond and equity markets interpret the decision.

Risks

  • Uncertainty over the RBA's forward guidance - a hawkish tone could further strengthen the Australian dollar and pressure local equities, while a dovish tone could have the opposite effect.
  • Persistently elevated inflation driven by rents, food prices and import costs may force additional policy action if the trajectory does not ease as expected, affecting borrowing costs and asset valuations.
  • Downside pressure on resource-sector earnings from sliding commodity prices, particularly in gold and precious metals, could amplify losses in the ASX 200 regardless of central-bank decisions.

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