Australia’s Central Bank Raises Rates to 4.35%, Flags Higher-for-Longer Inflation

CNBC reported Tuesday that Australia’s central bank lifted its benchmark interest rate to 4.35%, matching a peak last seen in December 2024. The decision marked the third back-to-back increase from the Reserve Bank of Australia, and came in line with forecasts from a Reuters poll of economists. Eight of nine board members voted in favour of the move.

RBA Points to Middle East as Key Inflation Driver

The RBA cited a sharp pickup in price pressures during the second half of 2025. Ongoing conflict in the Middle East has pushed fuel and commodity costs sharply higher. The bank warned those energy price increases are likely to generate broader knock-on effects across goods and services. Inflation forecasts were revised upward to 4.8% for the June quarter and 4% through end-2026. Both figures are well above the RBA’s 2%-to-3% target band.

The central bank also projected its own policy rate reaching 4.7% by December 2026. That would represent an additional 35 basis points of tightening beyond the current level. Should rates breach 4.35%, it would mark the highest borrowing cost since late 2011.

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Background: A Tightening Cycle Built on Persistent Price Pressures

Australia’s inflation problem has deepened steadily. Consumer prices climbed 4.09% in the first quarter of this year, the fastest pace in over two years. Monthly data for March showed annual inflation reaching 4.6%, the highest reading since the country began publishing monthly CPI figures in 2025. The RBA had already flagged at its March meeting that additional hikes were probable, though board members were divided on timing.

Also Read: Bank of England Holds Rates Amid Global Growth Concerns

Banks and Analysts Expect Further Tightening

ANZ Bank described the RBA’s post-meeting tone as more hawkish than anticipated. The lender noted no obvious window for a pause at the June meeting, while cautioning that another hike is not a certainty. The board appeared intent on preserving flexibility rather than committing to a fixed path.

Abhijit Surya, Senior APAC Economist at Capital Economics, forecast a further increase to 4.6% in the third quarter. He argued that upside surprises in incoming inflation data make continued tightening the most likely outcome.

Australia’s economy expanded 2.6% year-on-year in the fourth quarter of 2025, its strongest performance in two years. That growth pace gave the RBA additional confidence to keep tightening without triggering an immediate downturn. Growth forecasts for 2026 were nonetheless trimmed to 1.3% from a prior estimate of 1.8%.

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