RBA raises interest rates by 25 bps in the third consecutive rate hike this year

Australia’s central bank raised interest rates for the third time this year on Tuesday, pushing borrowing costs back to post-pandemic highs and warning that inflation is likely to remain persistent amid a global oil shock tied to conflict in the Middle East.

The Reserve Bank of Australia lifted its benchmark cash rate by 25 basis points to 4.35% at the conclusion of its May policy meeting, effectively reversing the three rate cuts delivered earlier in 2025. The decision marked a more hawkish stance from policymakers, passing with an 8–1 vote compared with a narrow 5–4 split at the previous meeting.

Governor Michele Bullock said the recent series of rate increases had moved monetary policy into slightly restrictive territory, giving the central bank room to pause and assess evolving risks to inflation and economic growth stemming from the ongoing conflict.

She noted early signs that businesses were beginning to pass higher costs on to consumers, adding that the cumulative impact of the three rate hikes should help keep inflation expectations under control. At the same time, Bullock emphasized that the central bank remained alert to both upside inflation risks and potential downside threats to growth if geopolitical tensions persist.

In its statement, the board said inflation was likely to stay above target for some time, with risks still tilted to the upside, including the possibility of rising inflation expectations. Higher fuel prices were identified as a key driver, with policymakers warning of potential second-round effects on the broader prices of goods and services.

Despite the tightening, the central bank signalled it may now pause, noting that policy settings are well positioned to respond to further developments.

Inflation had already reached 4.6 percent in March, fuelled in part by rising energy costs, while core inflation remained well above the bank’s 2 to 3% target range. The surge in oil prices linked to the US-Israeli conflict with Iran has also prompted the RBA to revise its outlook, forecasting inflation could peak near 5% this year while lowering expectations for economic growth and employment.