Alan Kohler on the RBA's U-Turn: Rate Hike Exposes Costly 2025 Cuts

On the first Tuesday of February, the Reserve Bank of Australia raised its cash rate by a quarter of a percentage point, taking it to 3.85%. It is the first increase since 2023, and it arrives just months after the bank cut rates three times during 2025.

Governor Michele Bullock said the board had updated its assessment of the economy and concluded the cash rate was no longer at the right level to bring inflation back to target in a reasonable time. The target is 2.5%. Figures for the December quarter showed headline inflation at 3.6% over the year and underlying inflation at 3.4%. The board now expects it to take longer for inflation to return to target, which Bullock called an unacceptable outcome. She acknowledged that people with mortgages would not welcome the news, but said it was the right thing for the economy.

Alan Kohler, the ABC's finance expert, discussed the decision on ABC News Daily with host Sam Hawley. He had expected the bank to hold, and said he was wrong again. In his view, the decision amounts to an admission that last year's cuts were a mistake. The RBA has lifted its forecast for core inflation in June from 3.2% to 3.7%. Kohler had thought December's CPI rise, driven mainly by international airfares, would not force a change in that forecast. It did, and with inflation heading higher, he said, the bank had to act.

For borrowers, the cost is immediate. Hawley noted that someone with a $1 million loan will pay about $150 more each month. Kohler explained the logic: higher repayments make households spend less and force businesses to cut costs, which generally means job losses. The RBA considers unemployment at 4% a little too low and forecasts it rising to 4.3%. Kohler thinks the bank would prefer 4.5%. Its mandate covers price stability and full employment, but it defines full employment as the level of joblessness that does not push inflation up, which it puts at roughly 4.4% to 4.5%.

Kohler had also argued against the first cut in February 2025. Unemployment was 4%, inflation was 2.4%, in the middle of the target range, and he saw no need to move. He said he also supports the national push to improve housing affordability, and knew interest rates are the main influence on house prices. He considers the final cut, in August, probably unnecessary.

The gap between the last cut and the first hike was six months. Kohler said the historical average is ten months, though in 2002 the bank reversed after only four, having cut six times following the dot-com crash. He called six months a bad look. He praised the RBA for openly trying to walk a narrow path, taming inflation without lifting unemployment or slowing the economy too much, but said he does not think it has succeeded.

The larger damage, he argued, was to housing. Prices rose 8.6% nationally last year, including 14.5% in Brisbane and 16% in Perth, more than double the growth in wages. Lower rates let existing borrowers pay down loans faster, but they also let buyers bid higher, and strong migration added to demand. Kohler said this derailed the efforts of all levels of government to improve affordability. He also pointed to construction costs, a big contributor to the CPI rise, and called housing a fundamental layer of the cost of living problem.

Looking ahead, Kohler said market economists expect at least one more hike this year and possibly a third. If inflation reaches 3.7% in June as forecast, he suspects another rise will follow, and he thinks the bank will keep lifting rates until inflation reaches 2.5%. Policy takes time to work through the economy, certainly more than six months and possibly twelve, though he expects an quicker effect on house prices, which he sees as a good thing.