The Reserve Bank of Australia (RBA) has just made its first interest rate decision of 2026, and it’s a significant one. At its February meeting, the RBA increased the official cash rate by 0.25%, bringing it to 3.85% — the highest level in seven months. [abc.net.au]

This move was widely expected by economists due to persistent inflation and stronger‑than‑expected economic activity late in 2025. [investordaily.com.au]

Let’s break down what’s happening — and what it means if you’re borrowing or planning to borrow.

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📈 Why Did the RBA Raise Rates?

The RBA is concerned that inflation picked up again in the second half of 2025, rising above what they had previously forecast.

• Headline inflation: ~3.6%
• Underlying inflation: ~3.4%
  Both are higher than ideal and above the RBA’s 2–3% target band. [rba.gov.au]

They’ve also noted:

• Private demand is running hotter than expected (people are still spending strongly). [investordaily.com.au]
• Labour market conditions are a bit tight, which can push wages up and add to inflation. [abc.net.au]
• Capacity pressures (e.g., in construction and services) continue to drive prices upward. [commbank.com.au]

In short:
The economy is still running too warm, and inflation isn’t cooling as quickly as hoped — so the RBA is applying the brakes.

RBA Governor Michele Bullock acknowledged this decision may disappoint borrowers but emphasised that letting inflation remain high would be even more harmful, as prices for groceries, services, and everyday essentials would continue climbing. [domain.com.au]

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🏡 What This Means for Borrowers Right Now

1. Higher Monthly Repayments

Banks have already begun responding. For example, Commonwealth Bank has confirmed it will increase variable home loan rates by 0.25%, in line with the RBA’s move. [sohu.com]

If you’re on a variable rate, expect your repayments to rise.

2. Reduced Borrowing Power

When rates rise:

• Banks reduce how much they’re willing to lend you.
• Your borrowing capacity drops because the repayment buffer increases.

This affects first‑home buyers and investors most.

3. Potential for More Rate Rises

While nothing is guaranteed, the RBA is keeping the door open for further hikes if inflation doesn’t ease. Bullock stated the board “isn’t ruling anything in or out.” [realestate.com.au]

Economists also believe more hikes are possible if demand stays strong. [abc.net.au]

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💡 Practical Advice for Borrowers

1. Stress‑Test Your Budget

Check how your repayments would look if rates rose another:

• 0.25%
• 0.50%
• 0.75%

This can help you avoid surprises if the RBA tightens further.

2. Consider an Offset or Redraw Strategy

Offset accounts help reduce interest by lowering your effective loan balance. Tools from major banks (like CBA) can help model the benefits. [sohu.com]

3. Build a Buffer

Aim for at least 3–6 months of living expenses in savings. Rising rates often come with broader economic uncertainty.

4. Review Your Loan Structure

Ask yourself:

• Is part‑fixing your loan wise right now?
• Would switching to fortnightly repayments help?
• Should you consolidate other debts while rates are still manageable?

5. Keep an Eye on Inflation Data

The RBA adjusts future decisions based on upcoming inflation and spending numbers. Staying informed helps you time borrowing decisions more strategically.

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🏁 Bottom Line

The RBA’s February 2026 rate rise to 3.85% is a response to stubbornly high inflation and strong economic activity. For borrowers, this means:

• Higher repayments
• Lower borrowing power
• Possible future rate rises

But with smart planning — buffers, budgeting, and reviewing your loan structure — you can stay ahead of the curve.

Contact us via a call to 03 9855 9290 or email info@mdmfinance.com.au for a more detailed examination of your particular situation.