The Reserve Bank of Australia (RBA) has lifted the cash rate by 25 basis points to 4.35%, marking its third increase this year as policymakers respond to persistent inflationary pressures and rising global risks.
In its statement, the RBA pointed to escalating geopolitical tensions as a key driver behind its decision.
“Developments in the Middle East are having an impact on inflation,” the Board said.
“Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly.
“This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.”
Board leaves door open to further hikes
The decision was backed by an 8–1 majority, signalling a high level of concern among policymakers about inflation expectations becoming entrenched.
The RBA said inflation risks remained “tilted to the upside” and that it had “therefore judged appropriate to increase the cash rate target”.
“Having raised the cash rate three times, monetary policy is well placed to respond to developments and the board is focused on its mandate to deliver price stability and full employment,” the Board said.
“It will do what it considers necessary to achieve that outcome.”
Economists see hawkish stance continuing
Ebury economist Anthony Malouf said the hike had been "widely expected".
"The RBA raised rates for the third time this year, to 4.35%. This was consistent with our long-held view,” Malouf said.
“Interestingly the RBA updated their forecasts in their May SMP, and it showed that the RBA isn’t expecting a dramatic rise in unemployment despite lower economic growth.
“Given the RBAs dual mandate (inflation/full employment) - I think this means they will remain more hawkish, which could provide near term support for the Aussie.”
However, Malouf questioned whether the RBA’s labour market expectations may prove too optimistic.
“In our view, it is quite optimistic to have such a low rate of unemployment given the slowdown in growth they forecast.
“But as we all know, the Australian labour market has been incredibly resilient in recent years, and this strength could persist further even in the face of weaker growth. However, despite holding a similar view that growth will slow, we forecast the unemployment rate will rise to around 4.5% by end of 2026 before peaking around 4.6% by mid-2027.”
Higher rates and energy costs to pressure households and business
CreditorWatch chief economist Ivan Colhoun said there was “little argument” that higher rates were needed to moderate stubborn inflation, but said the RBA could have waited for greater clarity on geopolitical risks.
“While there is little argument that a further increase in interest rates was warranted to moderate stubbornly above-target Australian inflation, we saw a credible argument that it was prudent for the RBA to await further clarity on how the Iran conflict might play out and its impact on the economy and inflation,” Colhoun said.
“Still much higher oil prices and considerably weaker economic conditions could result if there is no quick resolution to the closure of the Strait of Hormuz.
“Either way, the combination of higher interest rates and higher energy prices will add to pressures not only on household budgets, but also on the costs of doing business.
“This is likely to result in some increase in insolvencies in the months ahead unless a peace agreement can be reached relatively soon.”