Reserve Bank of Australia lifts cash rate to 4.35% on inflation fears

The Reserve Bank of Australia has lifted its official interest rate to 4.35%. Photo / Supplied

The Reserve Bank of Australia has hiked its cash rate target by 25 basis points to 4.35% because of the likely impact the conflict in the Middle East will have on inflation.

The bank said inflation picked up materially in the second half of 2025 and information since the beginning of this year confirmed some of this increase reflected greater capacity pressures.

It was the Reserve Bank of Australia’s (RBA’s) third rate hike this year and it was widely expected.

“In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation,” it said.

“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 the conflict is resolved soon and fuel prices decline, predicts 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.

The bank noted that 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 households and businesses, the RBA said.

Today’s policy decision was made by the majority: eight members of the RBA’s monetary policy committee voted to increase the cash rate target by 25 basis points to 4.35%, while one member voted to leave it unchanged at 4.1%.

The Reserve Bank of New Zealand has kept its Official Cash Rate low at 2.25% but economists expect the central bank to start tightening soon because of higher inflationary pressures.

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