RBA hikes the Cash Rate by 25bps to 3.85%, as expected, with the decision unanimous, while it stated that inflation is likely to remain above target for some time

• A wide range of data confirms inflation has picked up materially.
• Broad measures of wage growth continue to be strong.
• Uncertainty in the global economy remains significant but has so far not affected Australia.
• Job market conditions are a little tight.
• Capacity pressures are greater than previously assessed.
• Private-sector demand is growing faster than expected.
• There are uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive.

• Underlying inflation is higher than expected. Underlying inflation rose to 3.4% over the year to the December quarter, which was higher than expected three months ago and substantially higher than expected in the August Statement.
• GDP growth has continued to pick up, with private demand growth surprisingly strong. GDP grew by 2.1% over the year to the September quarter, which was around our estimate of the economy’s potential growth rate.
• Labour market conditions have been stable. The unemployment rate has been broadly stable at around 4.25% in recent quarters.
• Overall, capacity pressures in the Australian economy are judged to be greater than previously anticipated.
• Forecasts assume a cash rate of 3.9% in June 2026, 4.2% in December 2026 and 4.3% in December 2027.
• Trimmed mean inflation is seen at 3.7% (prev. 3.2%) through June 2026, 3.2% (prev. 2.7%) in December 2026, and 2.7% (prev. 2.6%) in December 2027.
• CPI Inflation is projected at 4.2% (prev. 3.7%) in June 2026, 3.6% (prev. 3.2%) in December 2026, and 2.7% (prev. 2.6%) in December 2027.
• Annual GDP growth is projected at 2.3% (prev. 2.0%) in December 2025, 1.8% (prev. 1.9%) in December 2026, and 1.6% (prev. 2.0%) in December 2027.

The RBA's unanimous decision to hike the cash rate by 25bps to 3.85% aligns with market expectations, reflecting growing concerns over persistent inflation, which they note will likely remain above target for the foreseeable future. The stronger-than-expected inflation data coupled with robust wage growth suggests a need for further tightening, reinforcing a hawkish bias in their monetary policy outlook. This backdrop could exert upward pressure on the AUD and influence cross-asset correlations, particularly in fixed income and forex markets.