RBA lifts cash rate to 4.35%, unwinding last year’s cuts as Bullock warns of rough months ahead

Australia’s central bank has raised interest rates by 0.25 percentage points to 4.35 per cent, returning the cash rate to its February 2025 level and fully unwinding last year’s cuts. Governor Michele Bullock cautioned that Australia is “staring down the barrel” of a rough period as inflation rises, the economy slows and unemployment gradually picks up.

“These interest rate rises are not going to do anything for inflation in the next six months. That’s done and dusted,” Ms Bullock said. The decision, taken a week before the Albanese government delivers its federal budget on May 12, was backed by a majority of the board: eight members voted for the 25-basis-point increase to 4.35 per cent and one voted to leave the cash rate at 4.10 per cent.

Financial markets had priced in roughly an 80 per cent chance of a move. The bank’s move followed a sharp acceleration in headline inflation in March, driven by a 32.8 per cent jump in automotive fuel prices as the war in the Middle East pushed energy costs higher.

The conflict has sparked the biggest global energy shock since the 1970s, with crude oil rising above US$120 a barrel in recent weeks. Rising fuel costs have begun to push headline inflation higher in Australia, and the RBA expects those pressures to seep into every expenditure class in the Consumer Price Index and lift underlying inflation in the months ahead.

The RBA has now increased rates three times this year—in February, March and May. Economists noted the bank was already concerned about inflation before the war erupted in February, and they argued this hike was needed to demonstrate its commitment to returning inflation to the 2–3 per cent target range.

Earlier this week, former senior RBA official Jonathan Kearns, now chief economist at Challenger, said the bank should lift rates to reduce the risk of stagflation.

With policy back at its February 2025 level, the central bank signalled a challenging near-term outlook: inflation pressures are set to intensify even as activity slows and unemployment edges higher, a combination Ms Bullock described as a “very rough time” in the coming months.