The Reserve Bank (RBA), in the face of a likely harsh Federal budget just one week away, has shown true independence and resolution to tackle inflation by increasing the base cash rate by 0.25% to 4.35%.
There is no doubt that a hold on rates today by the RBA would have been welcome by many and seemed a possibility with the federal budget hot on the heels of its decision today.
Another factor that could have swayed the RBA to hold rates steady at a 4.1% level was the fact there was no increase to the trimmed mean inflation rate at 3.3%, it was the same as the March 2026 estimate.
And while all major banks suggested a rate rise was on the cards for today, there was a vocal group of industry analysts suggesting a rise was unwise and that it could plunge the country into a recession.
The RBA rate increase today represents the third 0.25% increase this year and wipes out the three rate cuts this current RBA board had made during 2025, with the effect of reducing the base rate from 4.35% set at the RBA meeting in November 2023 with 0.25% cuts in February, May and August 2025 reducing the rate to 3.60%.
The RBA held the 3.60% base cash rate from August 2025 until it began its three 2026 rate rises of 0.25% in February 2026 to 3.85%, to 4.1% in March 2026 and to 4.35% today.
The base cash rate increase of 0.25% to 4.35% struck today comes on the back of the USA/Israel attack on Iran on 28 February 2026 that has crippled oil and fertiliser deliveries worldwide, with no short-term end in sight.
And follows an inflation blow-out of 4.6% for the 12 months to March 2026, up from 3.7% in February.
Anyone with what is considered an average $600,000 variable rate mortgage at an interest rate of 5.80% will be slugged on average another $96.00 a month, but that may be the least of their worries with the USA/Israel attack on Iran estimated at increasing electricity by 25.4%, fuel 24.2% and some meat products by 15.5% during April 2026.
Only one of the nine RBA board members voted to keep rates on hold.
The RBA monetary statement regarding the immediate rate rise and prospect of future rises follows.
Statement by the Monetary Policy Board: Monetary Policy Decision
Number 2026-12
Date 5 May 2026
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.35 per cent.
Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.
The Bank has updated its forecasts to incorporate recent data and developments in the Middle East. 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.
Financial conditions have tightened this year. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated. But credit is readily available to both households and businesses.
There are materially heightened uncertainties about the outlook for domestic economic activity and inflation. 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. A longer or more severe conflict could put further upward pressure on global energy prices; this would push up near-term inflation and could also increase inflation further out as these costs are passed through and if price rises get built into longer term inflation expectations. But higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia.
Decision
As expected, developments in the Middle East are having an impact on inflation. 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.
In light of these considerations, the Board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations. It was therefore judged appropriate to increase the cash rate target.
The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand and the outlook for inflation and the labour market. 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.
Today’s policy decision was made by majority: eight members voted to increase the cash rate target by 25 basis points to 4.35 per cent; one member voted to leave the cash rate target unchanged at 4.10 per cent.
