RBA hikes cash rate to 4.35%

The board of the Reserve Bank of Australia (RBA) has today (5 May) announced its decision on monetary policy for May, determining to lift the official cash rate by 25 basis points to 4.35 per cent.

The May decision marks the third consecutive 25-basis-point hike for the year, continuing the tightening cycle that began in February when the RBA first lifted interest rates to cool stubborn inflation.

The last time the official interest rate was at 4.35 per cent, it remained there for over a year – with the RBA increasing the cash rate in November 2023 to 4.35 per cent and holding it there until February 2025.

Today’s policy decision was made by majority: eight members voted to increase the cash rate target by 25 basis points to 4.35 per cent; one member voted to leave the cash rate target unchanged at 4.10 per cent.

It stated that the move was driven by persistently high inflation, a firm labour market, and a rapid surge in fuel costs sparked by the military conflict in the Middle East.

The board reaffirmed its dedication to bringing inflation back into the 2–3 per cent target band.

The minutes for the May rate decision read: “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. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.

“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. It was therefore judged appropriate to increase the cash rate target.

“The board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand and the outlook for inflation and the labour market. Having raised the cash rate three times, monetary policy is well placed to respond to developments and the board is focused on its mandate to deliver price stability and full employment. It will do what it considers necessary to achieve that outcome.”

The move comes after stubborn inflationary pressures. The consumer price index indicator for March came in at 4.6 per cent, jumping from 3.7 per cent in February, the largest monthly increase since the ABS began the series in 2017.

While the RBA’s preferred trimmed mean inflation held steady at 3.3 per cent, it increased 0.8 per cent over the quarter.

As such, the RBA moved to hike the cash rate again rather than wait until the next cash rate decision (on 16 June 2026).

While the Commonwealth Bank of Australia, ANZ, and NAB all predicted a single May hike followed by an extended period on hold, Westpac is forecasting two more hikes in June and August.

Interim Finance Brokers Association of Australia chief executive Peter White warned that the rate rise risked compounding pressure in both the owner‑occupier and rental markets.

“I’m not an economist but it’s not rocket science that this affects lower-income earners more than anyone else.”

Noting that the federal government is set to release its budget next week, he said there was time for the federal government to provide support to home buyers. He said this included walking back any potential changes to capital gains tax and negative gearing, which, when coupled with rising rates, could be “a toxic mix of pain and devastation”.

“These are not economic factors beyond our control, but decisions that are directly leading to darker times for many, and I hope both the RBA and federal government can change course before it’s too late,” White said.

Anja Pannek, the CEO of the Mortgage and Finance Association of Australia, commented: “Another rate rise is difficult news for borrowers already managing higher repayments and broader cost-of-living pressures.

“Inflation remains above the RBA’s target band, but the latest data also shows that much of the recent increase has been driven by fuel and global price pressures. That makes this a challenging environment for both policymakers and households.

“For borrowers, the practical message is clear: reach out to your broker to get their assistance to review your loan and understand your options sooner rather than later.

"Mortgage brokers can assist borrowers to compare the market, negotiate with their current lender and consider whether their loan structure still suits their circumstances.”

Brokers have also warned that rising rates will put additional pressure on borrowers. Speaking on the Broker Daily Uncut podcast, Finni broker Eva Loisance said that – with more rate hikes being forecast by some lenders – defaults could rise.

“People that bought at 95 per cent LVR plus are right on the edge of what they could afford … We already had two rate hikes and with a third and maybe a fourth one, the more we’re going to see more defaults this year.”

She added: “Servicing is still very tight and any rate hike is damaging that. What we’re seeing is a few lenders have opened up to 95 per cent LVR … but we haven’t seen any banks saying: ‘We’re going to drop the assessment rate to really push against it.’ It’s 3 per cent on top [of advertised rates] now. So borrowing capacity is just decreasing.”

Similarly, Evolve Lending & Finance managing director, Mark Stevenson, said that while the RBA would have been “hesitant to punish consumers already dealing with higher fuel prices thanks to the Middle East conflict,” he said the RBA board is focused on “taming” inflation.

“Underlying inflation, which the RBA focuses on, is at 3.3 per cent – outside its target range of 2–3 per cent.

“Unfortunately, rates will be rising again, and the RBA could go even further in the coming months and take the cash rate above 4.5 per cent – somewhere it hasn’t been since 2011,” he said.

Stevenson said mortgage holders will be hoping the upward rate cycle will be a temporary one if the Iran war is resolved and fuel prices fall.

“The increased costs of fuel and the knock-on effects have impacted the budgets of everyone, and people have been tightening the screws,” he said.

“While being uncomfortable for many and tipping others into hardship, the situation may help induce an economic realignment which will hopefully pay dividends when the price of oil drops.”

[Related: Cash rate will hit 4.85% this year: Westpac]

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