By Stella Qiu and Wayne Cole
SYDNEY, May 5 (Reuters) – Australia’s central bank lifted rates for a third time this year on Tuesday, returning borrowing costs to post-pandemic highs and warning that inflation would remain sticky as the conflict in the Middle East unleashed a global oil shock.
Wrapping up the May policy meeting, the Reserve Bank of Australia raised its main cash rate by 25 basis points to 4.35%, undoing all of the three rate cuts made in 2025. The board voted 8–1 in favour of the hike, a hawkish shift from March’s narrow 5-4 split.
Markets, which had wagered on an 80% chance of a rate hike on Tuesday, imply around a 20% chance of a further move in June. An increase to 4.60% by September is fully priced, which would be the highest since late 2011..
“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,” the board said in a statement.
“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.”
Yet the RBA also emphasised that having raised the cash rate three times, “monetary policy is well placed to respond to developments,” hinting it might pause for now.
Inflation had already climbed to 4.6% in March, driven by higher fuel costs, while the closely watched core measure remained uncomfortably above the RBA’s 2%-3% target band.
The oil price spike triggered by the U.S.-Israeli war on Iran saw the RBA sharply raise its forecasts for inflation this year, tipping a peak near 5% while cutting the outlook for economic growth and employment.
Tuesday’s hike was largely priced in, with the Australian dollar a touch lower at $0.7162 while three-year government bond futures were little changed at 95.33.
HORMUZ RISK
“With domestic and global inflation pressures colliding, the RBA had little choice but to hike today,” said Harry Murphy Cruise, head of economic research at Oxford Economics Australia.
“What happens next for rates largely depends on the Strait of Hormuz,” Murphy said, referring to the strategic waterway now virtually shut by Iran and through which 20% of global oil usually flows.
“A prolonged closure would force the RBA’s hand to hike rates multiple times this year to tame inflation and inflation expectations.”
The RBA charted a softer course than its global peers during the post‑pandemic inflation surge, prioritising hard-won gains in the labour market over rapid tightening. Interest rates peaked at 4.35% early last year before three cuts pulled them back to 3.6%.
That gamble backfired in the second half of the year as inflation reignited, a risk now supercharged by the Iran war and a fresh global energy shock. The U.S. and Iran launched new attacks in the Gulf on Monday, lifting Brent crude futures to $114 a barrel, up over 50% from pre-conflict levels.
Business and consumer confidence in Australia crashed on fears that the war may tip the economy into a recession, while the housing market has lost steam amid higher borrowing costs and geopolitical uncertainty.
The labour market remains the outlier, with the jobless rate holding at a historically low of 4.3%.
(Reporting by Stella QiuEditing by Shri Navaratnam)
Comments