SYDNEY - Australia's central bank on Tuesday raised its key interest rate for the first time in more than two years in response to a spike in inflation.

The Reserve Bank of Australia (RBA) said on Tuesday that its Monetary Policy Board unanimously decided at its first meeting of 2026 to raise the cash rate target from 3.60 percent to 3.85 percent.

It marks the first increase to the cash rate target since November 2023 and comes after the central bank cut rates by 0.25 percentage points on three separate occasions in 2025.

The Monetary Policy Board said on Tuesday that inflation has fallen substantially since its peak in 2022, but picked up materially in the second half of 2025.

According to the latest official data from the Australian Bureau of Statistics (ABS), the consumer price index (CPI) rose by 3.8 percent in the 12 months to December 2025, up from 3.4 percent in November.

The trimmed mean, a measure of underlying inflation preferred by the RBA, rose by 3.3 percent in the year to December, up from 3.2 percent in the year to November.

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The Monetary Policy Board said on Tuesday that it now considers that inflation is likely to remain above the 2-3 percent target band "for some time."

"It is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labor market conditions are a little tight," it said.

In updated forecasts released on Tuesday, the RBA said it expects annual CPI growth to reach 4.2 percent in June 2026, up from the 3.7 percent it projected in November, before falling to 2.9 percent in June 2027.