Australia's central bank ramps up inflation fight with third rate hike this year

“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. Inflationhad 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 US-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. '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 US 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%.

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