Reserve Bank of Australia hikes interest rates by another 25 basis points to 4.35 per cent

Reserve Bank governor Michele Bullock has hinted at even more pain after home borrowers copped a third-consecutive mortgage hike with her board almost unanimously voting to increase the cash rate by another 25 basis points to 4.35 per cent.

The worst inflation in almost three years convinced eight of the nine members on the RBA monetary policy board to raise rates to the highest level since February 2025, undoing the effects of the central bank’s three cuts last year and adding at least $120 to average monthly mortgage repayments.

Ms Bullock said a tight labour market before the Iran war was further fuelling inflationary pressures, and hinted Tuesday’s increase may be far from the last to combat a possible wage-price spiral.

“Developments in the Middle East remain highly uncertain but under a wide range of possible scenarios, the conflict adds to global and domestic inflation,” she told reporters on Tuesday.

“If left unchecked, higher costs get embedded into price and wage-setting decisions.

“These second-round effects could lead to even higher and more persistent inflation and if so, would require even more tightening in monetary policy to get inflation under control.”

Updated Reserve Bank forecasts have assumed a 15-year high cash rate of 4.6 per cent, which is a quarter of a percentage point higher than now with the latest increase.

Updated RBA forecasts published on Tuesday predicted inflation would climb to 4.8 per cent by June, up from a February prediction of 4.2 per cent made before the US and Israeli strikes on Iran.

“Already, we’ve seen a sharp increase in fuel and related commodity prices and this is already feeding through to inflation - the recent increases in interest rates will have no impact on this,” Ms Bullock said.

“What these increases do, however, is help to contain the domestic inflationary pressures.”

Inflation in March hit a near three-year high of 4.6 per cent, putting it even further above the board’s 2 to 3 per cent 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. It will do what it considers necessary to achieve that outcome,” the RBA said.

“With the conflict in the Middle East continuing, there are plausible scenarios where inflation is higher and activity lower than envisaged under the baseline forecast.”

Treasurer Jim Chalmers said the latest RBA rate rise would be tough on borrowers, as he prepares to next week deliver his fifth Budget.

“Australians are already paying a hefty price for this war in the Middle East and this decision will make things harder for people,” he told reporters in Canberra.

“Just because this was the decision that was widely expected and broadly anticipated won’t make it easier for millions of Australians with a mortgage.”

The RBA has now raised rates at three consecutive meetings for the first time since March 2023, during its last hiking cycle.

The latest quarter of a percentage point increase adds $121 to an average, new, owner-occupier mortgage of $736,000.

Unemployment was tipped by the Reserve Bank to hold steady at 4.3 per cent by the end of 2026, before rising to a six-year high of 4.6 per cent by December 2027.

Tellingly, the RBA forecast growth of 2.3 per cent for 2025-26, up from 2.2 per cent predicted in February.

“In our view, it is quite optimistic to have such a low rate of unemployment given the slowdown in growth they forecast,” Ebury economist Anthony Malouf said.

By the end of next year, headline inflation was forecast to moderate to 2.4 per cent - or the mid-point of the RBA’s target band.

“The bank has updated its forecasts to incorporate recent data and developments in the Middle East,” the RBA said in its updated quarterly statement on monetary policy.

“The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February.

“It then declines as demand growth slows and capacity pressures ease in response to higher interest rates.”

ANZ, NAB and the Commonwealth Bank were predicting that this would be the last RBA increase, but Westpac is forecasting two more hikes this year that would take the RBA cash rate to an 18-year high of 4.85 per cent.

One more increase would take the RBA cash rate to a 15-year high of 4.6 per cent, with the RBA’s statement on monetary policy assuming a cash rate of 4.6 per cent from December 2026 onwards.

“There is now a credible risk that rates could rise to levels not seen for around 15 years,” Deloitte Access Economics partner Stephen Smith said.