The Reserve Bank of Australia (RBA) raised its cash rate target by 25 basis points to 4.35%, marking the third consecutive rate hike and fully reversing last year's rate cuts. The decision was made with an 8-1 vote and was largely anticipated by markets [1]. The RBA's May 2026 Statement on Monetary Policy highlighted that inflation is expected to remain above target 'for some time,' with risks still tilted to the upside, particularly due to the ongoing Middle East conflict, which has sharply increased energy prices and is causing second-round effects on broader goods and services prices [1].
Key figures from the RBA's updated forecasts include a revision of December 2025 CPI inflation to 4.8% (up from 4.2%), trimmed mean inflation at 3.8% for December 2025 and forecast at 3.5% for June 2026, and GDP growth forecasts for 2026 cut to 1.3% for both the June and December quarters (down from 1.8% and 1.6% previously). Unemployment currently stands at 4.3% and is expected to rise gradually to 4.7% by mid-2028. Based on market pricing, the Board sees the cash rate rising a further 35 basis points to 4.70% by the end of 2026 [1].
The RBA Board emphasized that it is not finished with tightening, stating, 'Inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations.' Governor Michele Bullock acknowledged the challenges faced by Australian households due to higher rates, stating, 'People often say to me, ‘you must have a better thing than the interest rate.’ Well we don’t, it’s all we have. The interest rate is the tool we’ve got. It’s blunt.' [1]
The RBA also noted that the baseline scenario assumes a near-term de-escalation of the Middle East conflict, which would allow oil prices to gradually decline over the coming quarters. However, the central bank was candid about the trade-off between controlling inflation and slower economic growth, with household consumption expected to weaken as higher prices erode real incomes [1].
CONCLUSION
The RBA's decision to raise rates for a third consecutive time underscores its commitment to tackling persistent inflation, even as growth forecasts are trimmed and unemployment is expected to rise. With further tightening signaled and inflation risks still elevated, the market impact is high and the outlook remains cautious for Australian households and businesses.