As markets largely expected, the Reserve Bank (RBA) has lifted the cash rate target by 25 basis points to 4.35 per cent at its May meeting. The move returns the cash rate to where it sat before last year’s three-rate-cut easing cycle began in February 2025.

 

The decision was passed by an 8-1 majority vote. The central bank cited the conflict in the Middle East and the flow-on impact of higher fuel prices as a growing risk to inflation.

 

The RBA said higher fuel costs are likely to spread through the economy and push up the price of goods and services, adding that a rate hike was already on the cards before the conflict as strong demand left less capacity to absorb new cost pressures.

 

Stopping inflation from sticking

RBA Governor Michele Bullock said the Board’s key concern was stopping higher costs from becoming locked into everyday prices and wages.

 

The recent rate rises are aimed at preventing ‘second-round’ price increases. “If left unchecked, higher costs can get embedded into price and wage-setting decisions,” Bullock said. She warned that this could lead to more persistent inflation and require further tightening in policy.

 

Bullock was clear about what interest rates can and cannot do.

 

“These interest rate rises are not going to do anything for inflation in the next six months,” she said, adding that the aim was to limit longer-term damage from global shocks.

 

She also acknowledged the hit to household living standards.

 

“Australians are poorer. There is no way out of that,” Bullock said. “The trade-off is much worse.”

 

What it means for housing

Higher interest rates have started to cool parts of the housing market, but there are few signs of a sharp downturn so far.

 

Price growth continues in Perth, Brisbane and Adelaide, where strong population growth and tight housing supply are still supporting demand.

 

By contrast, in Sydney and Melbourne, momentum has eased overall, though conditions vary by location. More affordable suburbs are still recording gains as buyers remain active at the lower end of the market.

 

Inflation still too high

Australia’s inflation rate remains well above the Reserve Bank’s target band. Data released by the Australian Bureau of Statistics (ABS) last week showed annual inflation rose to 4.6 per cent in the year to March, above the RBA’s 2 to 3 per cent target.

 

Ahead of next week's Federal Budget, Treasurer Jim Chalmers noted Australians were already paying a “hefty price” for the war in the Middle East. Bullock highlighted inflation places the greatest strain on lower‑income households, particularly those with little savings and limited ability to absorb rising costs.

 

Australia an anomaly

Australia is now moving in a different direction to many other advanced economies, where central banks have paused or cut rates. 

 

In the United States and parts of Europe, inflation has eased more clearly and demand has slowed. In Australia, underlying inflation remains elevated, demand has proven resilient and population growth has added pressure to prices.

 

The RBA said Australia is more exposed to swings in global energy prices, which can see higher fuel costs flow through to transport, food and services more quickly than in some other economies.

 

Westpac economics expects two further rate increases in 2026.