The Reserve Bank of Australia has raised its official cash rate for the third consecutive time this year, taking it to 4.35% and effectively erasing all the monetary easing delivered in 2025.
Surging energy prices tied to the Middle East conflict have pushed inflation well above target, forcing policymakers to balance rising price pressures with a deteriorating growth outlook.
The decision, taken on an 8-1 vote, underscores the dilemma now facing central banks worldwide: energy-driven price pressures that conventional monetary policy cannot easily address are forcing rate rises even as economic momentum fades.
The decision and the vote
The RBA’s nine-member monetary policy board voted eight to one to increase the cash rate target by 25 basis points to 4.35%, with one member preferring to hold at 4.10%.
The bank did not identify the dissenting board member.
The three consecutive hikes — in February, March and May — have now fully unwound the three rate cuts delivered in 2025, returning the cash rate to the peak of the previous tightening cycle.
The board assessed that inflation was likely to remain above target for some time and that risks remained tilted to the upside, including to inflation expectations.
It cited the Middle East conflict’s impact on fuel and commodity prices and early signs that firms are passing those cost pressures through to consumers as key factors in its decision.
Inflation outlook shifts sharply higher
Headline CPI rose to 4.6% in the year to March — its highest level since 2023 — driven largely by surging fuel prices tied to the ongoing disruption in the Middle East.
The RBA’s quarterly Statement on Monetary Policy forecasts headline inflation to peak at 4.8% in the June quarter, well above the 2% to 3% target band, before declining as demand slows and capacity pressures ease.
The bank’s baseline forecast assumes Brent crude peaks at around $100 per barrel in the second quarter of 2026, that the Strait of Hormuz is reopened soon and that shipping flows return to pre-conflict levels by the fourth quarter of 2026.
Brent was trading at approximately $114 a barrel at the time of the decision — well above the bank’s baseline assumption — highlighting the degree of uncertainty embedded in any forecast at this juncture.
Underlying inflation, measured by the trimmed mean, is also expected to peak in mid-2026 before declining as monetary tightening takes hold and capacity pressures ease.
Short-term measures of inflation expectations have risen sharply, and the bank noted early evidence that cost pressures are feeding through to broader goods and services prices, raising the risk of second-round effects becoming entrenched.
Growth and jobs to soften
Annual GDP growth has been downgraded across the entire forecast period, with growth expected at 1.9% in June 2026, declining to 1.3% in December 2026 and remaining at that level through June 2027, before a modest recovery to 1.4% by late 2027.
The peak in household consumption growth has been cut to 1.9% in June 2026, down from a previously expected 2.8%, while business investment forecasts have also been trimmed.
Markets are currently pricing in a further 60 basis points of tightening in 2026, implying a cash rate of around 4.70% by year-end — a technical assumption the RBA incorporated into its modelling.
The labour market is expected to hold up in the near term before gradually softening.
The unemployment rate is forecast to peak at 4.7% in June 2028, higher than the 4.6% peak expected in previous forecasts.
Risks under prolonged disruption
In adverse scenarios where the Strait of Hormuz remains closed beyond the baseline assumption, Brent crude could peak at around $145 a barrel, domestic GDP would be 0.5% to 0.8% lower than the baseline, and shipping flows would not resume until the first quarter of 2027.
“A much larger pullback in spending by households and businesses in response to the heightened uncertainty would be expected to create more spare capacity in the economy and result in inflation returning to target sooner than otherwise,” the RBA said.
That scenario, in which demand destruction does the job that rate rises cannot, would represent a painful path to price stability.
The broader challenge
Governor Michele Bullock said the bank must now contend with one of the most difficult combinations of economic forces it has faced — a supply-side energy shock that raises prices while simultaneously threatening to undermine growth and employment.
With three consecutive hikes already delivered and markets pricing further tightening, Australian mortgage holders face mounting pressure.
A $700,000 variable-rate mortgage will cost approximately $340 more per month than at the start of 2026 once the hikes are fully passed through — about $4,080 extra a year.
Westpac has forecast two further rate hikes in 2026, which would take the cash rate to its highest level since 2008.
Whether that scenario materialises will depend almost entirely on how long the Strait of Hormuz remains closed — a question no central bank model can reliably answer.
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