Australia has bucked the global trend by delivering a third straight rate hike in May, placing pressure on already-stretched households. But other countries are holding steady, so why are we different?
The Reserve Bank of Australia raised the official cash rate by 25 basis points to 4.35% in May, completely unwinding the three cuts delivered over 2025.
It's the fastest RBA easing-to-tightening cycle of its type in 15 years.
RBA governor Michele Bullock said higher fuel prices are adding to already too-high inflation, which will likely drive up the prices for goods and services more broadly.
"We already had a problem with inflation," Ms Bullock said on Tuesday. "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."
As nations across the globe feel the inflationary flow through effects of two months of war in the Middle East, the RBA’s expected tightening of interest rates highlights a growing divergence from comparable economies.
Continued tightening has significant implications for borrowers and for the wider housing market. National home prices fell 0.1% in April, new PropTrack data shows, marking the first price fall this year.
The national median home value is still 8.5% higher than a year ago at $910,000, but consumer confidence is on a slippery slope as the bank looks to further dampen borrowing power.
REA Group senior economist Eleanor Creagh said uncertainty is weighing on confidence.
"Population growth and ongoing supply constraints exacerbated by higher construction costs and elevated interest rates continue to place a floor under prices," Ms Creagh said.
Governor Michele Bullock announced a third straight rate hike in May. Picture: David Gray
Last week, the US Federal Reserve and the Bank of England (BoE) both held rates steady, while central banks in Canada, Japan and the European Union have also adopted a more cautious, wait-and-see approach.
All these nations are feeling the pinch from the global oil crisis and all are faced with similar supply chain issues plaguing Australia. None of their citizens, however, face interest rates higher than 3.75%.
| Central bank | Australia | US | UK | Canada | Europe | Japan |
| Equivalent cash rate | 4.1% | 3.75% | 3.75% | 2.25% | 2.15% | 0.75% |
So, why is Australia different?
At the crux of the divergence is inflation. While price pressures remain elevated globally, Australia’s inflation problem is proving particularly persistent and the issues were there long before the Iran conflict began on February 28.
Notwithstanding a fleeting period early last year, headline inflation has been outside of the RBA’s 2-3% target range since 2021.
No matter how cautious the RBA tried to be when it eased interest rates in 2025, hindsight provides the great reality that inflation was never quite tamed.
Data published by the Australian Bureau of Statistics last week shows the Consumer Price Index (CPI) rose to 4.6% for the 12 months to March, up from 3.7% in February.
Underlying inflation, while stable over the last four months, is also running too hot, albeit it has held steady at 3.3% over the year to March.
This figure, called the trimmed mean, discounts the most volatile price hikes and drops each month to paint a more accurate and long-term picture of the economy from which the bank can forecast.
Oil prices remain elevated amid supply constraints either way. This is now feeding through to transport, construction and everyday household costs and the RBA has made it clear in recent public appearances that it does not know how the public will respond.
The RBA is under pressure. Picture: Getty
With no clear map for the public spending appetite as winter approaches, inflation, if left unchecked, risks becoming baked into the economy, Ms Bullock warned.
"[The oil shock] occurred at a time when inflation was already too high, and we know that a price that sticks in people's brains is a petrol, so the problem then is this is adding to concern that people will just start to think, 'well, inflation is just starting to become embedded'."
The labour market remains relatively tight and while cost pressures are biting, demand has not slowed enough, with the RBA noting the economy is operating close to capacity. This means even business-as-usual behavior will weigh heavily on prices and risk pushing inflation higher.
Economic growth, even modest, is not an issue either the United Kingdom or wider Europe is facing. Subsequently, their policymakers are wary of tipping their economies into recession.
The European Central Bank held rates at 2% last week, pointing to concerns about slowing economic activity across the eurozone.
The European Central Bank, Frankfurt. Picture: Halil Sagirkaya/Anadolu via Getty Images
The BoE also chose not to move interest rates from 3.75%, stating, like the RBA, that the economic impact in the UK is dependent on how long the war continues.
Unlike the RBA, the BoE was quick to note monetary policy “cannot affect global energy prices”.
“Our job is to make sure inflation does not persist,” it stated.
The US Federal Reserve has signaled it is waiting to see more flow on impacts, while Canada is also facing cooling growth.
After years of ultra-low interest rates, Japan is continuing to normalise policy having last pushed through a hike in December.
The Bank of Canada, Ottawa. Picture: Al Drago/Getty Images
After a dangerous post-Covid inflation spike, the RBA has little choice but to show a commitment to acting faster and harder this time around.
Beyond the three hikes already delivered this year, Westpac has forecast a further two cash rate hikes in the months ahead.
For now, both buyers and homeowners look set for a long period of uncertainty. The RBA has stated it is determined to keep inflation low, stable and within target. In the 40 quarters since 2016, it has only achieved this 13 times.
Other central banks may be on hold, but Australia’s inflation fight might only just be starting.
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