The Reserve Bank has raised the cash rate for the third time in a row as it looks to cool spending and prevent price pressures and high inflation becoming entrenched in the economy.
The RBA raised the official cash rate by 25 basis points to 4.35% on Tuesday, completely unwinding the three cuts delivered over 2025.
The move had been widely expected by economists, as households and businesses continue to face increased cost pressures as the Iran war moves into its tenth week.
In a statement following the decision, the RBA board said 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," the RBA said.
"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."
Reserve Bank of Australia Governor Michele Bullock has delivered a third straight rate hike. Picture: Martin Ollman
In her post-meeting press conference, RBA governor Michele Bullock said Australians are poorer because of this shock to oil prices - but the trade off of not getting inflation under control was 'much worse'.
"We already had a problem with inflation," she said. "Would we have had to had three increases? I don't know the answer to that, but what I can say is that this oil shock has complicated things immensely.
"And although we're trying very we are looking through some of it, we can't look through everything. We've got to be cognizant of the potential impact on inflation and expectations."
The decision was made by majority, with eight board members voting to hike the cash rate, while just one member voted to keep rates on hold.
It's a blow to households who are already grappling with elevated fuel prices driven by the war-induced global oil shock. Impacted supply chain routes and goods and services availability worldwide have caused already-high domestic inflation to continue rising, keeping pressure on the RBA to intervene with rate rises.
Households have already seen their mortgage repayments rise this year. Picture: Getty
REA Group senior economist Anne Flaherty said there is a chance rates will continue to rise as the year goes on.
"With inflation expected to remain elevated, there is a strong possibility that interest rates could move even higher in 2026," Ms Flaherty said.
“For mortgage holders on variable rates, this will add further pressure to already stretched household budgets.
“Higher interest rates are also reducing borrowing capacities which is already placing downwards pressure on home prices.”
Property prices fell 0.1% in April in the first drop for the year, taking the national median home value to $910,000, according to the latest PropTrack Home Price Index.
Property prices still remain 8.5% higher than a year ago, adding around $92,200 to the value of the median home.
Ms Flaherty said expected higher interest rates throughout 2026 will add further downwards pressure to prices.
Inflation in focus
Inflation was already running above expectations before the war and remains well outside the RBA’s 2–3% target band, where it has sat for more than six months.
Headline inflation hit a three-year high of 4.6% in March, slightly below forecasts, but still uncomfortably high. Over the year to March, housing, transport and food prices surged 6.5%, 8.9% and 3.1% respectively, strengthening the case for another hike.
Even with the government’s fuel excise relief in place, fuel costs spiked 32.8% in March alone.
Underlying inflation, at 3.3%, has been steady for several months, but the full impact of the war has yet to show up in the data, with the RBA expecting the peak in June.
Mortgage repayments to rise
Already shaky consumer confidence has also fallen in recent weeks, with mortgage repayments and property market strength now under increased pressure.
PropTrack has calculated how much Tuesday's rate rise could add to minimum repayments on a median priced home if lenders pass on the hike.
The data shows households could face an increase of almost $2,000 over the course of a year in the more pricey parts of the country.
| City | Median property price | Base monthly repayments | Base repayments with a 0.25% rate rise | Monthly change |
| Canberra | $878,188 | $4234.76 | $4348.60 | $113.84 |
| Adelaide | $946,743 | $4565.34 | $4688.07 | $122.73 |
| Brisbane | $1,078,276 | $5199.61 | $5339.39 | $139.78 |
| Darwin | $615,064 | $2965.93 | $3045.66 | $79.73 |
| Hobart | $728,005 | $3510.55 | $3604.92 | $94.37 |
| Melbourne | $852,558 | $4111.16 | $4221.68 | $110.52 |
| Perth | $1,023,678 | $4936.33 | $5069.03 | $132.70 |
| Sydney | $1,246,510 | $6,010.86 | $6,172.45 | $161.59 |
Despite slowing market momentum, Metricon chief executive Brad Duggan told realestate.com.au Australian consumers were “surprisingly robust”.
“People have shown great resilience in the face of the last two interest rate rises,” he said. “With this latest rate rise, Australians have been expecting it and I think that will take it in their stride.”
Three hikes are unlikely to lead to the same sort of impact as when interest rates were increasing back in 2023 and 2024, he added.
“So many people still want to buy or build, but they're looking for clarity and certainty before they move.”
Buyers are increasingly shifting their property search from houses to units, while also looking to take advantage of cheaper price points in smaller capitals and regional areas.
Homes at the affordable end of the market are outperforming the middle and top quartiles. Picture: realestate.com.au
Over the past 12 months, home prices are up 16.9% in the nation’s cheapest capital Darwin, second only to Perth.
“I'm hoping that with this interest rate rise the consumer maintains that resilience and that they continue to be confident,” Mr Duggan said.
“There has to be conviction in the communication that comes out of the Reserve Bank, there can't be this sitting on the fence. People want certainty.”
Budget shake up
All eyes will be on the federal government next week when Treasurer Jim Chalmers delivers the 2026 Federal Budget, a fiscal package promised to bring cost of living and tax relief to millions.
Measures expected include scrapping the 50% capital gains discount for all assets, including residential property for an inflation-indexed alternative, the removal of negative gearing benefits and potential incentives to build new homes.
Targeted household relief including additional energy bill rebates or subsidies, rent assistance and property tax changes are also on the table, alongside income tax cuts from July.
Many are awaiting Treasurer Jim Chalmers decision on measures like the CGT discount. Picture: NewsWire / Martin Ollman.
Government spending and any potentially inflationary cash handouts will be closely watched.
The RBA last month said it needed ‘rock solid support from governments’ as it makes hard decisions with interest rates. It follows comments from RBA governor Michele Bullock earlier this year that government spending is weighing on the economy.
The government should now use next week’s budget to acknowledge it has had a “significant impact on the inflationary environment in Australia”, Mr Duggan said.
“It’s not the consumer's responsibility to carry the burden of trying to get inflation back under control,” he added.
The next cash rate decision will come on 16 June.
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