Source Credit : Portfolio Prints
Australia’s central bank raised its benchmark interest rate to 4.35% on Tuesday, returning it to its December 2024 peak, as policymakers confront persistently high inflation and rising global risks.
The decision by the Reserve Bank of Australia (RBA) was widely anticipated, aligning with a Reuters poll of economists, and marked the third consecutive rate hike. The board voted overwhelmingly in favor of the move, with eight members supporting the increase and one opting to hold rates at 4.1%.
In its policy statement, the RBA pointed to a renewed acceleration in inflation during the second half of 2025, driven in part by geopolitical tensions in the Middle East that have pushed up fuel and commodity prices. The bank warned that higher energy costs are not only lifting headline inflation but also feeding into broader price pressures across goods and services.
“Developments in the Middle East are having a material impact on inflation,” the RBA said, noting the growing risk of second-round effects as businesses pass on higher input costs.
The central bank expects inflation to remain above its 2%–3% target range for an extended period, with risks still tilted to the upside. Reflecting this outlook, the RBA signaled that further tightening may be necessary. Its updated projections show the policy rate rising to around 4.7% by December 2026—50 basis points higher than forecast earlier this year. Any move beyond 4.35% would push borrowing costs to their highest level since December 2011.
Inflation forecasts were also revised upward. The RBA now expects consumer prices to rise 4.8% in the June quarter and 4% over 2026, compared with previous estimates of 4.2% and 3.6%, respectively. At the same time, the bank downgraded its growth outlook, projecting the economy will expand by just 1.3% in 2026, down from an earlier estimate of 1.8%.
Analysts interpreted the central bank’s tone as notably more hawkish. In a post-meeting note, ANZ Bank said the RBA offered little indication of a near-term pause in tightening.
“That does not necessarily mean another rate increase is guaranteed,” ANZ noted, “but it does suggest the Board is intent on keeping its options open.”
Recent data underscore the inflation challenge. Australia’s economy grew 2.6% year-on-year in the fourth quarter, its fastest pace in two years, while consumer prices rose 4.09% in the first quarter—the highest level in over two years. Monthly data showed inflation climbing further to 4.6% in March, the highest since the country began publishing monthly CPI figures in 2025.
The RBA had already flagged the likelihood of additional rate hikes at its March meeting, though policymakers differed on timing. It reiterated that uncertainty around geopolitical developments remains high and could further complicate the inflation outlook.
“Under a wide range of scenarios, developments in the Middle East could add to both global and domestic inflation,” the bank said.
Looking ahead, economists expect the tightening cycle may not yet be over. Abhijit Surya, Senior APAC Economist at Capital Economics, forecasts the RBA will lift rates to 4.60% in the third quarter.
“Given the risk that inflation continues to surprise on the upside, further policy tightening remains likely,” he said.
