Reserve Bank lifts rates to 4.35%
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More news: Opposition treasury spokesman Tim Wilson says Australians “are paying the price” for Labor’s high spending, arguing any income tax offset will “just be consumed” by rising inflation.
Speaking from Melbourne on Tuesday, Wilson said the RBA’s decision to hike rates “made clear” that the board did not expect Chalmers to bring inflation under control.
“The treasurer has consistently poured debt petrol on the inflation fire,” he said.
“Australian households are paying the price because of Jim Chalmers’ active inflation agenda.”
Wilson said a predicted income tax offset in Tuesday’s budget is “likely to just be consumed” by rising inflation.
“[It is likely to just be consumed by inflation,” he said.
“The tax cuts that this government has offered to date have been consumed … and any earned income offset is likely to experience the same problems,” he said.
Wilson also rejected suggestions the Iran war had driven inflation, saying it sat above the RBA’s target band before hostilities erupted in February.
“The Iran conflict is compounding it, but the root cause of it starts in Canberra, because they are the ones who are driving it,” he said.
What they said: “We need the government to stop the spending binge, stop pouring debt petrol on the inflation fire, and have a pathway to a sustainable economy for the future that doesn’t seek to penalize mums and dads of Australia,” Wilson said.
Economy being ‘pummelled’ by Middle East war after rate hike: Chalmers
More news: Treasurer Jim Chalmers has warned the Australian economy is being “absolutely pummelled” by the Middle East war, arguing rising fuel prices were the primary driver of the RBA’s rate hike.
Speaking to reporters less than an hour after the decision, Chalmers accepted that widespread predictions of the rate rise wouldn’t “make it any easier” for Australians with a mortgage.
But Chalmers insisted next week’s budget would “play a helpful role” in the fight against inflation, stressing the RBA had not referenced public spending in the reasoning for its decision.
“Those people who are pretending that the government’s budget is the sole driver of prices in our economy or interest rate decisions, they weren’t saying that last year when interest rates were cut three times,” he said.
Chalmers again insisted the government “hasn’t hit print” on Tuesday’s budget, amid uncertainty over when the war will end and, by extension, its long-term economic impacts.
The treasurer said rising fuel prices are the “primary driver” of inflation, pointing to the government’s temporary halving of the fuel excise and incentives for electric vehicle uptake.
“Electric vehicles are a really important part of our efforts to get transport costs down for families, and to get emissions down in our economy,” he said.
Chalmers declined to respond directly when asked whether he blamed US President Donald Trump, whose war in the Middle East saw petrol prices spike.
“I’m not going to get into a rolling critique of the conduct of the war, but my job is to manage the Australian economy,” he said.
What they said: “The Australian economy is getting absolutely pummelled by this war in the Middle East and Australians are paying the price for that,” Chalmers told reporters.
RBA expects inflation to peak at 4.8% if Middle East conflict resolves ‘shortly’
More news: The RBA expects headline inflation to peak at 4.8% in June 2026 if the conflict in the Middle East resolves “shortly, with no further damage to energy infrastructure” and the cash rate lifts in line with market expectations to 4.7% by the end of 2026.
The central bank’s baseline forecast, outlined in the RBA’s quarterly statement on monetary policy, is also underpinned by the assumption that the Strait of Hormuz is “reopened soon” and shipping flows return to pre-conflict levels in Q4 2026. It forecasts Brent oil prices to peak “at around” USD100 per barrel in Q2 2026 and assumes Australia continues receiving enough imported fuel products to meet demand.
The RBA also assumes the recent fuel price spike has “relatively contained and short-lived effects on overall economic growth and on the labour market” but flows through to underlying inflation “relatively quickly” given existing economic capacity pressures.
The RBA expects CPI to fall to 2.4% by June 2027, faster than the fall to 2.6% by June 2028 expected in the previous statement of monetary policy in February. However, it is significantly higher in each half-year forecast period until then.
Trimmed mean inflation is expected to peak at 3.8% in June 2026 and has been revised higher, compared to the previous forecast, in every half-year forecast period until December 2027 when it is projected to be 2.6%, lower than the 2.7% previously expected.
Annual GDP growth has also been downgraded over the entire forecast period compared to the February statement, in part due to “the direct effects of the Middle East conflict” and as growth in iron ore exports slows.
Growth is expected at 1.9% in June 2026, 1.3% in December 2026 and June 2027, before picking up to 1.4% in December 2027 and June 2028. Lower growth at the end of the forecast period reflects a “reassessment of momentum ahead of the forecast period” and the higher rate hike pathway. Public demand however has not been significantly revised.
Business investment growth is expected to be 3.9% higher in the year to June 2026, up from the previously expected 3.7%, but is forecast to be lower in every other half-year forecast period. The peak of household consumption growth is expected to fall to 1.9% in June 2026, compared to the 2.8% previously expected.
The unemployment rate is also expected to peak at 4.7% in June 2028, higher than the 4.6% peak previously expected.
Alongside their baseline forecasts, the central bank has also released two adverse scenario forecasts that assume the conflict in the Middle East is “protracted, with further damage to energy infrastructure” with shipping flows resuming from Q1 2027 but not reaching pre-conflict levels by the end of the forecast period in June 2028.
In these two scenarios Brent crude prices are expected to peak at USD145 per barrel in Q2 2026, but the RBA considers this “somewhat of a tail risk”.
Reserve Bank lifts rates to 4.35%
The news: The Reserve Bank of Australia’s monetary policy board has lifted the cash rate to 4.35%, the third consecutive rate increase this year as headline inflation spikes amid high fuel prices in the wake of conflict in the Middle East.
The numbers: The RBA has returned interest rates to its peak of 4.35%, where it was held for more than a year between 2023 and 2024, and is the highest interest rate since November 2011.
The context: The decision was made by majority vote of eight members. One member voted for a pause at 4.1%.
Economists have been widely expecting the RBA to hike rates on Tuesday but have been split on the pathway forward, with the severity of headline inflation for the rest of the year highly dependent on the duration of conflict in the Middle East.
While headline consumer price index data came in lower than expected, it was still far above the 2.5% midpoint of the RBA’s target band at 4.6%, while underlying inflation came in at 3.3%. The labour market also remains tighter than preferred.
What they said: “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,” the RBA monetary policy board said in a statement.
“This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy,” it said.
“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.”
The sources: RBA monetary policy decision statement, Jim Chalmers press conference , Tim Wilson press conference
