The Reserve Bank of Australia increases its rate by 25 bps to 4.35%, and warns of persistent inflation giving it room for continued policy hikes.

On Tuesday, the central bank of Australia moved its benchmark cash rate up 25 basis points raising it to 4.35% – its highest level since 2008 – as soaring energy prices, related to the Middle East conflict, pushed annual inflation up to 4.6% well above the target range of interest rates set by the central bank, forcing the board’s hand for the third consecutive meeting this year.
The ruling was decided in an 8-1 vote, completely reversing last year’s easing cycle. The RBA observed that the previous increase was driven by the increasing capacity constraints in the economy and the increased fuel and commodity prices associated with the Middle East conflict contributed to the inflation pressure.

What was the driving force behind the 4.6% inflation rate?

The headline inflation in Australia shot up by 1.1% in March alone, lifting annual inflation to 4.6%, a marked increase since February, when it was 3.7%. Fuel was the key driver of the move – the cost of regular unleaded petrol shot up 33% and diesel prices shot up 41% in March, the largest monthly increase in fuel price data since it began being recorded by the Australian Bureau of Statistics in 2017. The increase of fuel alone added a full percentage point to the monthly increase.
The trimmed mean inflation rate, which is the preferred indicator of underlying inflation by the RBA, and removes the most volatile price changes, increased 0.8% in the March quarter, and 3.5% over the year, still well above the RBA preferred target band of 2-3%. The growth of market services prices was still too high and domestic price pressures were still firm in anticipation of the complete pass-through of increased transport and material costs as a result of the Iran war.
Although relief on fuel excise in April and a drop in global oil prices is likely to ease fuel-driven inflation in the June quarter, businesses have already indicated increased costs of transport and materials is a factor that suggest broader price pressures may build from here.

Bullock’s warning

RBA Governor Michele Bullock did not tone down her message at the press conference held after the meeting. She did not mince words about it: “It is a hard one – those mortgaged and indebted households. This is hurting them grievously. They have a two-fold whammy. She commented that although the rate increase will be hard on people holding mortgages, the greater danger is the inflation itself, especially to the most needy. “The people who are most impacted by inflation are the most vulnerable, the people on the lowest incomes. They’re the ones who don’t have savings.”
Bullock had issued warnings that cost pressures could not be allowed to run unchecked since they would become entrenched in the economy. Higher costs, she said, get embedded into price and wage-setting decisions, which in turn, could result in even higher and persistent inflation, and in this case, would require more tightening of monetary policy to get inflation under control.
On the contribution of the Middle East conflict Bullock said the war has complicated things immensely and made the trade-off much, much worse. She replied that she just did not know whether three rate cuts would have still been the action that was undertaken in 2025 in the event that there had not been war.
She painted an ugly picture of the world at a given moment, saying: We are staring down the barrel – not just here. There are many other countries staring down a similar barrel. It is a very, very tough time.

The stagflation risk

RBA Deputy Governor Andrew Hauser had earlier warned of the “nightmare” scenario where inflation accelerates even as growth weakens, complicating policy choices. He described surging energy prices tied to the Middle East conflict as a major income shock, eroding household purchasing power and lifting business expenses simultaneously. The mix of weak growth risks and persistent inflation leaves the central bank with little scope to ease, reinforcing the need to keep policy restrictive. 
Economist Stephen Koukoulas did not hold back in his assessment: “We were more optimistic at the worst point of the pandemic. It’s feeling worse now for consumers than in the early nineties recession. This is the worst consumers have felt about the economy.”

What it means for mortgage holders

The effect on borrowers is both cumulative and immediate. A homeowner who has a mortgage debt of $800,000 will pay an additional $363 each month due to the Tuesday hike, and the person who has a mortgage debt of $1 million will pay an extra $453 more of monthly debt repayments as a result of the hike on Tuesday as compared to the start of 2026.
Roy Morgan modelling projects mortgage stress will impact 1.6 million Australians – 30.3% of borrowers – after the May increase, up by 24.9% after the March increase. Macquarie Bank was quick to announce that it will fully pass on the entire rate increase to its mortgage holders, which will take effect May 22.
Home loans expert Richard Whitten at Finder put the current situation into perspective: “The current situation is in context, as the cost of living has continued to rise since then, meaning that the same rate now carries an even heavier burden. Now is the time to explore your options. If you have not refinanced or asked your lender to give you a better deal, you are all but certain to be paying too much.

What banks are predicting next

Westpac has even gone ahead to forecast two additional increases in 2026. Should such a materialisation come to pass, the cash rate would soar high not seen since 2008 which would further place pressure on cash-strapped Australians.
ANZ economists Madeline Dunk and Adam Boynton predict a stagnation of the hiking cycle after May but reported that the emphasis will be on the magnitude to which higher fuel and other costs are spilled over to consumer prices more generally. CBA Head of Australian Economics Belinda Allen explained that the board received conflicting signals, with inflation still too high, but with uncertainty regarding the effect higher rates and conflict in the Middle East would slow economic activity.
Sally Tindall of Canstar encouraged homeowners to stress-test their finances against not just the May hike but further increases: “Do the maths on what a cash rate increase on Tuesday would mean to your budget. In fact, do the maths on three more cash rate increases, as per the forecast of Westpac, and make sure you can clear this amount.
The RBA’s updated Statement on Monetary Policy, released alongside Tuesday’s decision, is expected to shed more light on the central bank’s inflation outlook and how many more meetings could see further action before the board feels comfortable pausing.