Australia hikes rates again and warns inflation will stay higher for longer
Inflation had picked up materially in the second half of 2025, and the conflict in the Middle East had resulted in sharply higher fuel and commodity prices.
MikeTyes
Michele Bullock, governor of the Reserve Bank of Australia (RBA), attends a news conference at the bank's head office in Sydney, Australia, on Tuesday, Dec. 9, 2025. Australia's central bank kept its key interest rate unchanged for a third straight meeting in a widely expected decision, while reiterating that future moves will hinge on incoming economic data. Photographer: Brendon Thorne/Bloomberg via Getty Images
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Australia's central bank on Tuesday raised its policy rate to 4.35%, matching its December 2024 peak, as inflation remains elevated.
The move by the Reserve Bank of Australia was in line with expectations in a Reuters poll of economists and marked its third consecutive rate increase.
Eight members of the board voted for the hike, while one voted to hold rates at 4.1%.
In its statement, the RBA said inflation had picked up materially in the second half of 2025, with conflict in the Middle East pushing up fuel and commodity prices.
"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," it added.
The central bank said that inflation is likely to remain above its 2% to 3% target for some time and that the risks remain elevated.
The RBA also appeared to signal that more rate hikes were on the horizon, with its economic forecasts pencilling in a 4.7% policy rate in December 2026, 50 basis points higher than projected in early February.
Should the policy rate exceed 4.35%, it would be the highest since December 2011.
Inflation forecasts for the bank were also upgraded to 4.8% for the June quarter and 4% for the year ending 2026, up from the previous February forecast of 4.2% and 3.6%, respectively.
Economic growth for 2026 was revised down to 1.3% from 1.8%.
ANZ Bank said in a note after the meeting that the RBA's tone was "more hawkish than we expected," adding that there was no clear opening to a pause in June as it expected.
"That does not necessarily mean that another rate increase is a foregone conclusion but instead signals that the Board's preference is to keep its options open," the bank said.
Australia's economy grew 2.6% from a year earlier in the fourth quarter, its fastest pace in two years, beating expectations.
The decision follows recent inflation data showing price pressures remain persistent. Consumer prices rose 4.09% in the first quarter from a year earlier, the highest in more than two years.
In March, inflation climbed to 4.6%, the highest since Australia began publishing monthly consumer price index data in 2025.
The RBA had signaled at its March meeting that further rate increases were likely, though policymakers differed on timing.
"Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation," the RBA said after its March meeting.
The RBA will hike rates to 4.60% in the third quarter of this year, according to Abhijit Surya, Senior APAC Economist at Capital Economics.
"Given the potential for incoming inflation data to surprise to the upside of the RBA's expectations, we think further policy tightening remains likely," Surya added.
