RBA lifts rates by 25 bps, marking its third consecutive increase in 2026

Australia’s central bank raised interest rates for the third time this year on Tuesday, returning borrowing costs to post-pandemic highs and warning that inflation is likely to remain persistent amid a global oil shock driven by Middle East tensions.

The Reserve Bank of Australia increased its benchmark cash rate by 25 basis points to 4.35% at the conclusion of its May policy meeting, effectively unwinding the three rate cuts implemented earlier in 2025. The move signaled a more hawkish tilt from policymakers, passing with an 8–1 vote, compared with the tighter 5–4 split seen at the previous meeting.

Governor Michele Bullock stated that the recent tightening cycle has pushed monetary policy into slightly restrictive territory, allowing room for a pause while officials assess evolving risks to inflation and economic growth linked to ongoing geopolitical tensions.

She pointed to early indications that businesses are beginning to pass higher input costs on to consumers, noting that the cumulative effect of the latest rate hikes should help anchor inflation expectations. At the same time, Bullock stressed that the central bank remains vigilant to both upside inflation risks and potential downside pressures on growth if tensions persist.

In its accompanying statement, the board warned that inflation is likely to stay above target for an extended period, with risks still skewed to the upside, including the possibility of rising inflation expectations. Elevated fuel prices were highlighted as a key driver, with concerns over potential second-round effects on broader goods and services prices.

Despite the latest increase, the central bank signaled it may now pause, indicating that current policy settings are well positioned to respond to further developments.

Inflation had already climbed to 4.6% in March, supported in part by higher energy costs, while core inflation remains well above the bank’s 2–3% target range. The surge in oil prices linked to the US-Israeli conflict with Iran has also prompted the RBA to revise its outlook, projecting inflation could peak near 5% this year, alongside downgraded expectations for economic growth and employment.