The Reserve Bank of Australia (RBA) has raised the cash rate by 25 basis points to 4.35%, citing mounting inflationary pressures and heightened global uncertainty linked to the ongoing conflict in the Middle East.
The decision, announced on Tuesday, reflects concerns over rising fuel and commodity prices, alongside persistent domestic capacity constraints.
The move was supported by a majority of policymakers, with eight members voting in favour of the increase, while one member opted to keep the rate unchanged at 4.1%.
In its Statement on Monetary Policy, the central bank noted stronger-than-expected economic activity in late 2025, alongside ongoing tightness in the labour market and sustained capacity pressures.
"GDP growth picked up strongly in the December quarter, as expected, to be above our estimates of its potential growth rate. Survey measures of capacity utilisation remained above average in February and March, suggesting that capacity pressures persisted into early 2026.
"Private investment was stronger than anticipated in the December quarter while household consumption growth was weaker than expected. Recent spending data suggest that there was a little less underlying momentum in household consumption prior to the conflict than had been anticipated.
"The labour market has evolved broadly as expected and conditions remain somewhat tight relative to full employment. The unemployment rate was unchanged at 4.3 per cent in March. A range of other indicators, including the underemployment rate and underutilisation rate, also suggest that labour market conditions remain somewhat tight."
The Board also noted emerging signs that businesses facing higher input costs are beginning to pass these pressures on through price increases, while short-term measures of inflation expectations have also risen.
"Headline inflation in Australia and many other economies increased in March as the direct effects of higher fuel costs flowed through to consumer prices.
"In Australia, CPI inflation increased to 4.6 per cent in the month of March, with fuel prices contributing 0.8 percentage points.
"The reduction in fuel excise duty from 1 April is expected to have reduced year-ended headline inflation in April by around 0.5 percentage points.
“Fuel cost increases typically pass through to other goods and services prices over time. Many consumer-facing firms in the RBA’s liaison program report that they have not yet passed through higher costs to their prices, although an increasing share now expect above-average price increases over the coming year.”
According to the Monetary Policy Decision statement, "The Bank has updated its forecasts to incorporate recent data and developments in the Middle East. The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February.
"It then declines as demand growth slows and capacity pressures ease in response to higher interest rates."
Financial conditions have also tightened over the course of the year. The Bank noted that money market rates and government bond yields have risen, while the Australian dollar has appreciated.
Despite this, credit remains readily available to both households and businesses.
The central bank also flagged a material increase in uncertainty around the economic outlook, particularly given the unpredictable trajectory of the Middle East conflict. Policymakers warned that a prolonged or more severe disruption could push inflation higher while simultaneously weighing on economic growth.
"There are materially heightened uncertainties about the outlook for domestic economic activity and inflation. With the conflict in the Middle East continuing, there are plausible scenarios where inflation is higher and activity lower than envisaged under the baseline forecast."
The Statement on Monetary Policy further outlined risks tied to sustained high energy prices and their broader economic effects.
"Uncertainty about the duration and severity of the conflict and its effects on the Australian economy mean the outlook is more uncertain than usual.
"A plausible risk is that the conflict is more prolonged and results in more significant and longer-lasting damage to energy production.
"If energy prices remain high over the forecast period because of a longer or more severe conflict, inflation can be expected to be higher, which will reduce growth in household disposable incomes and household consumption, and businesses potentially reducing investment spending.
"If uncertainty becomes particularly high, households and businesses could cut their spending by much more, which would mitigate some of the increase in inflation but lead to a higher unemployment rate."
The Board concluded that inflation is likely to remain above target for an extended period and that risks remain skewed to the upside, reinforcing the need for tighter monetary policy settings.
