The Reserve Bank has increased interest rates amid a global energy shock that threatens to push Australian inflation towards 5% in a split decision, leaving the door open to further hikes.
The hike takes the RBA’s cash rate target from 3.85% to 4.1%, back to where it was in February 2025, wiping out the relief offered by two cuts last year.
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.
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.
The broadening Middle East conflict has triggered fears of fuel shortages and is adding to price pressures around the world, forcing global central banks to prepare for higher interest rates.
Australia’s Reserve Bank had been the only one expected to hike so soon, with central banks in the US, UK, European Union, Japan, Canada, Switzerland and Sweden all expected to leave rates on hold this week.
Even before the US struck Iran, Australian inflation had already been elevated at 3.8% – well above the bank’s 2-3% target.
In a statement accompanying the decision, the RBA board said inflation could stay higher for longer than previously expected as the jobs market and economy more broadly were now running hotter than the bank had realised.
“The Board judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside,” the statement read.
The economy has been growing at its fastest pace in almost three years and unemployment has fallen since September.
Conflict in the Middle East would see prices surge in the short-term and risked pushing up Australians’ expectations for higher inflation, the RBA board warned in its statement.
“Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation,” the statement read.
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.
“Financial conditions have tightened a little this year, but the extent to which monetary policy is restrictive is uncertain,” the RBA board said.
Markets, however, bet against more rate rises after the board’s split decision and acknowledgement of risks on both sides. The ASX200 bounced 0.2% and the Australian dollar fell from 70.8 US cents to 70.55 US cents.
The treasurer, Jim Chalmers, in a statement acknowledged that the Middle East conflict had worsened the inflation challenge, but said “this will be really tough news for millions of Australians with a mortgage”.
“At a time of immense global instability, this will put even more pressure on families and businesses,” the treasurer 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.”
Some economists, though, had warned the RBA needed to leave interest rates on hold for fear of a downturn in consumer spending.
Household spending had already slowed and soaring petrol prices would restrict spending further, while potentially giving inflation only a temporary boost, AMP economist Shane Oliver wrote ahead of the meeting.
“It makes sense to wait for at least some of the dust to settle from the Iran war, because it could end in a month, making any boost to inflation from higher petrol prices a short term blip,” Oliver said.
Households are the gloomiest they have been since the onset of the Covid-19 pandemic in early 2020, ANZ’s weekly consumer sentiment survey revealed on Tuesday morning.
International conflict, petrol prices and rate hike fears had severely damaged Australians’ confidence in the economy, according to Sophia Angala, an ANZ economist.
The RBA governor, Michele Bullock, will explain the decision at 3.30pm AEDT in Sydney.
