The board unanimously deemed monetary policy needs to be more restrictive to bring inflation back to target.

Quarterly trimmed mean inflation came in at 1% from July to September - an annualised rate of over 4%, while the 0.9% read for the December quarter translates to slightly over 3.6% on an annual basis.

Combined with the shock drop in unemployment in December, the economy looks to be nearing full capacity (using all of the labour and other productive resources available), which can make even moderate economic growth inflationary.

In the statement that accompanied the decision, the RBA board said the pick up in inflation was "material" and likely to remain above target "for some time."

"It is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight," read the accompanying statement.

Mortgage holders will be bracing themselves for the inevitable announcements over the next few days from Australia's lenders confirming the hike will be passed on in full to variable mortgage rates.

On the plus side though, Aussies looking to save should also shortly receive the news that their savings account provider has passed on the rate hike.

More hikes to follow?

After a half year of underlying inflation well above target, the question now becomes whether this hike sees the cash rate restrictive enough.

New RBA modelling estimates both headline inflation and the trimmed mean rate will be outside of the target range until 2027 - a forecast predicted on the market assumption there will be at least one more rate cut on top of this one.

It's a view shared by economists including Senior NAB Economist Taylor Nugent, who says the RBA needs a 'modest policy recalibration' of 50 bps.

"NAB expects another 25 bp increase in May before an extended pause at 4.1%, a level [NAB] sees as somewhat restrictive," Mr Nugent said.

There will be a monetary policy decision before then on 17 March, but the May decision will benefit from consumer price index data for the first quarter of 2026, set for release 29 April.

Productivity a handbrake on growth?

Another eye catching prediction in the Statement on Monetary Policy - released along with the cash rate decision - is a downward revision to GDP estimates. 

The RBA are now expecting the economy to grow 1.8% throughout 2026 (down from 1.9%) and just 1.6% in 2027 (down from 2%).

That's despite the inflation forecast remaining above the midway point of the target band until at least the second half of 2028, suggesting the RBA feels the economy is close to full capacity.

Capacity pressures can limit how fast an economy can grow without prices going up - it means there's not much 'slack' to pick up an increase in demand.

Labour productivity (measured in GDP per hour worked) is one of the main ways an economies capacity can expand, and HSBC Chief Economist Paul Bloxham says weak productivity growth over the past few years is the "key story" in why prices keep going up.

"Productivity growth has been dismal, and this has constrained the supply-side of the economy," Mr Bloxham explained.

The RBA are expecting productivity to improve, with the annual rate for December 2025 expected to be 0.7%, up from 0.2% - this might be an important number eventually when the board start to consider rate cuts again.