Published: 3 February 2026 • Australian shares rally despite first rate hike in more than two years.
Yes — interest rates went up today. The Reserve Bank of Australia lifted the cash rate target by 25 basis points to 3.85%, marking its first increase in more than two years. Yet rather than spooking investors, the decision coincided with a sharp rally in local equities, with the S&P/ASX 200 climbing to around 8,876 points in afternoon trade.
The benchmark index was up more than 1.1% on the day, adding close to 98 points, as markets interpreted the rate move as a signal of economic resilience rather than distress. The reaction underlined a familiar market dynamic: rate hikes driven by strong demand and stubborn inflation can be absorbed when growth expectations remain intact.
Market snapshot
• Cash rate: 3.85% (up 25bp)
• ASX 200: ~8,876 (+1.1%)
• Previous close: 8,778
The central bank’s decision followed evidence that inflation, while well below its 2022 peak, picked up materially in the second half of 2025. Policymakers said stronger-than-expected private demand, renewed momentum in housing, and ongoing capacity pressures risk keeping inflation above target for longer than previously assumed.
Household spending and business investment have both surprised on the upside in recent months. Housing activity and prices are also continuing to rise, adding another layer of pressure in an economy where supply capacity has struggled to keep pace with demand. Against that backdrop, the bank judged that leaving policy unchanged risked allowing inflationary forces to re-entrench.
Financial conditions, meanwhile, have eased over the past year. Credit remains readily available to households and firms, and the bank noted that the full effects of earlier rate reductions are still working their way through the economy. Market pricing had already begun adjusting ahead of the decision, pushing bond yields and money market rates higher — a shift that helps explain why equity investors appeared relatively unfazed by the formal hike.
The labour market remains another area of focus. Unemployment has been slightly lower than expected, underutilisation remains low, and while headline wage growth has eased from its peak, broader measures of labour costs remain elevated. For policymakers, that combination reinforces concerns that inflation could prove more persistent without a firmer policy stance.
For borrowers, the immediate implication is straightforward: higher interest rates generally translate into higher mortgage repayments over time, particularly for those on variable loans. Lenders’ responses will determine the speed and scale of pass-through, but the direction of travel is clear. Savers may see modest benefits through improved deposit rates, though these often lag changes on the lending side.
From a market perspective, today’s ASX 200 rally suggests investors are betting that Australia’s economy can withstand tighter policy — at least for now. Rate hikes driven by strong demand can be viewed as a vote of confidence in underlying growth, especially when corporate earnings expectations remain firm.
Looking ahead, the central bank signalled no preset path. Decisions will be guided by incoming data on inflation, domestic demand, labour market conditions, and global developments. The board reiterated its commitment to price stability and full employment, making clear it will do what it considers necessary to achieve that balance.
The official statement accompanying today’s decision is available via the Reserve Bank of Australia.
