RBA makes ‘inevitable’ decision to increase rates by 25bp

Yasmine Raso

Senior Journalist

5 May 2026

In the wake of a challenging inflation print, the Reserve Bank of Australia (RBA) has made the ‘inevitable’ decision – as perceived by the majority of the market – to deliver its third consecutive 25-basis-point cash rate hike so far this year to 4.35 per cent.

What most described as a ‘foregone conclusion’ – given headline CPI rose to 4.6 per cent in the 12 months to March and the RBA’s preferred ‘trimmed mean’ measure still came in above its two-to-three-per-cent target range at 3.3 per cent – the central bank said this outcome made by majority vote was the economy’s best path back to more comfortable conditions.

“Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures,” the RBA Board said in its statement.

“In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.

“The Bank has updated its forecasts to incorporate recent data and developments in the Middle East. The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February. It then declines as demand growth slows and capacity pressures ease in response to higher interest rates.

“Financial conditions have tightened this year. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated. But credit is readily available to both households and businesses.

“There are materially heightened uncertainties about the outlook for domestic economic activity and inflation. With the conflict in the Middle East continuing, there are plausible scenarios where inflation is higher and activity lower than envisaged under the baseline forecast.

“A longer or more severe conflict could put further upward pressure on global energy prices; this would push up near-term inflation and could also increase inflation further out as these costs are passed through and if price rises get built into longer term inflation expectations. But higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia.”

The central bank confirmed the decision was made by a majority vote, with eight members in favour of increasing the cash rate by 25 basis points and only one voting to keep it at 4.10 per cent.

“As expected, developments in the Middle East are having an impact on inflation,” the Board’s statement said.

“Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.

“In light of these considerations, the Board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations. It was therefore judged appropriate to increase the cash rate target.”

The last time the official cash rate stood at 4.35 per cent was in December 2024, after an eight-month streak of holds that commenced exactly 12 months prior before it was lowered to 4.10 per cent in February 2025. RBA Governor, Michele Bullock, noted that the central bank remains “attentive to the data and the evolving assessment of the outlook and risks to guide its decisions”.

“In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand and the outlook for inflation and the labour market,” the statement said.

“Having raised the cash rate three times, monetary policy is well placed to respond to developments and the Board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome.”