The Reserve Bank has increased interest rates and left the door open to further hikes, warning inflation will stay higher for longer amid war in Iran and soaring petrol prices.
The hike followed a move in February and lifted the RBA’s cash rate target to 4.1%, back to where it was in February 2025, wiping out the relief offered by two cuts last year.
Michele Bullock, the RBA governor, said strong growth in employment and spending had kept upward pressure on prices and the war in Iran would only worsen the problem.
“High petrol prices will add to inflation, but they’re not the reason for today’s decision,” she said.
“Inflation was already too high.”
The bank wanted to cut household spending and prevent businesses passing on higher fuel costs by charging higher prices, the governor said.
“If we don’t bring the excess demand down, then businesses are just going to build that into their costs, so it’s going to be even worse for everyone,” Bullock said.
Household budgets, already under pressure after a rate rise in February and soaring petrol prices, will face higher mortgage costs.
A household with a $600,000, 25-year mortgage – approximately the average size of a new mortgage – will see their weekly repayments rise by another $91 a month, once their bank passes the hike on.
“This hit with the fuel prices and this additional rise in mortgage rates is going to be hard for some people, I do understand that, but it’ll be much worse if inflation gets built into the fibres,” Bullock said.
The RBA was not aiming to put Australia into recession or cause a significant rise in unemployment, the governor said.
“It’s still possible, if this resolves, that everything will turn out OK … [but] if we have to change tack, we will,” Bullock said.
The broadening Middle East conflict has triggered fears of fuel shortages and is adding to price pressures around the world.
Australia faced high inflation, at 3.8%, before war broke out, and its central bank was the only one predicted to hike so soon. Central banks in the US, UK, European Union, Japan, Canada, Switzerland and Sweden are all expected to stay on hold this week but keep rates higher for longer.
The RBA board in a statement said Australian inflation could be higher for longer than it had expected, as the jobs market and economy had unexpectedly continued to run too hot.
The board left the door open to further hikes, warning credit was still easy to access and it was not clear rate hikes were restricting borrowing.
Five members of the bank’s monetary policy board voted to raise interest rates while four voted to hold, marking the RBA’s narrowest call since it began disclosing votes in July.
All members agreed rates should rise but the four holdouts wanted to wait until May, for a clearer picture of Australia’s momentum in 2026 and the effects of the Iran war, Bullock said.
A third rate hike for 2026 was still predicted for May by major banks CBA, ANZ, NAB and Westpac, though CBA warned the call was “line ball”. Markets were betting a fourth was likely but not certain to come by the end of the year.
The treasurer, Jim Chalmers, said the Middle East conflict had worsened Australia’s inflation challenge and the government would “do what we responsibly can to respond”.
“There’ll be more savings in the budget in May,” he said.
KPMG’s chief economist, Dr Brendan Rynne, said growing economic activity in Australia meant it would be “naive to pin today’s rate rise solely on the Middle East conflict”.
“Even prior to this, the economy was vulnerable to another rate rise,” Rynne said.
“Put simply, the inflation genie never quite got back in its bottle, and the RBA is now having another go.”
