The Reserve Bank lifted the cash rate by 25 basis points this afternoon, taking it to 4.35 per cent; the same level it reached in late 2023 when inflation was “out of control”.
It’s the third consecutive hike of 2026, leaving mortgage holders and those already struggling to absorb further pain.
Why the board moved
The decision wasn’t unanimous. Eight members voted to raise the rate; one held out for a pause at 4.10 per cent.
In its statement, the board pointed to two pressures. Inflation picked up materially through the second half of 2025, and recent data suggest that part of that lift reflects capacity pressures in the economy, meaning Australia is operating close to capacity, and any extra demand pushes prices up rather than output. On top of that, the conflict in the Middle East has driven fuel and related commodity prices sharply higher, with the cost already feeding into headline inflation.
The Australian Bureau of Statistics monthly indicator put inflation at 4.6 per cent in March, up from 3.7 per cent in February.
What’s causing the increase in inflation rates?
A lot of blame and hostility will be directed towards the Reserve Bank Governor, Michele Bullock, for the decision, but is that just? The short answer is no.
The Reserve Bank is the last line of defence against inflation, and they’re quite a blunt instrument in that it can only do one of three things:
- Leave rates on hold
- Reduce rates to spark the economy
- Raise rates to slow down inflation
Will today’s rate rise curb inflation? Again, it’s unlikely to have the effect they’d like, and it will likely result in further rate rises this year.
So what is causing inflation, given that people generally don’t have a lot of disposable cash at the moment, and discretionary spending is down?
The conflict in the Middle East is obviously a factor, with Crude Oil prices having jumped considerably in the last several weeks amid global shortages. This naturally flows through the economy, making everything more expensive.
But didn’t the rates start rising before the conflict in Iran properly kicked off?
One of the biggest factors driving inflation is government policy and spending.
Federal and state governments combined have been spending at historically high levels as a share of GDP, and when the RBA talks about “capacity pressures,” that’s part of what they mean. Government demand competes with private demand for the same constrained pool of workers, materials, and services, keeping prices elevated.
In this instance, the government — both federal and state — has more power to slow inflation than the Reserve Bank.
Basil Zempilas commented, “This is another blow to WA households already being smashed by Labor’s cost-of-living crisis.”
“Every mortgage holder in WA is paying the price for a government that has failed on housing, failed on cost of living, and failed to ease pressure on family budgets.”
What it means for repayments
Macquarie was first to move, announcing within hours of the decision that it would lift variable home loan and savings rates by 0.25 percentage points from Friday, May 22nd. The other big four banks are expected to follow.
For a borrower with a $1 million mortgage, the cumulative effect of this year’s three hikes works out to around $453 a month in extra repayments compared with January.
More hikes on the table
The board kept its options open, saying it would “do what it considers necessary” to bring inflation back to target.
Westpac is the most hawkish of the major banks, forecasting two more 25-basis-point increases at the June and August meetings, which would push the cash rate to 4.85 per cent — a level not seen since 2008.
Treasurer Jim Chalmers hands down the federal budget on Tuesday, a week in which mortgage holders will be hoping for something to help with the cost of living that doesn’t add fuel to the fire.
