‘Do what is necessary’: RBA hikes cash rate as petrol prices soar

Frustrated mortgage holders have copped a further blow, with the Reserve Bank lifting the official cash rate for the third consecutive time this year and flagged there could be further hikes.

Following a two-day meeting, the RBA announced on Tuesday it had raised the official cash rate by a further 25 basis points, taking it to 4.35 per cent.

Eight of the nine board members voted to increase the cash rate, while one member voted to leave the cash rate target unchanged at 4.10 per cent.

The board said inflation was too high at 4.6 per cent, well above its target range of 2-3 per cent, and suggested further rate hikes could be on the agenda, saying it will pay close attention to future data and the global economic climate.

Governor Michele Bullock told reporters after the release that inflation in Australia was “already too high” before the US-Iran war began on February 28.

“The shock to oil and some other commodity prices has worsened the trade off between inflation and growth,” she said.

“Already, we’ve seen a sharp increase in fuel and related commodity prices, and this is already feeding through to inflation.

“The recent increases in interest rates will have no impact on this.

“What these increases do, however, is help to contain the domestic inflationary pressures after the inflation due to oil and related commodity prices eases.”

“Now I understand this is a really difficult time for households who are already facing higher fuel prices and other cost of living pressures, but we must get on top of inflation now so that it doesn’t get away from us.”

She said both private sector and government spending have added to demand, but said the Iran war had had a major impact.

“The bottom line, though, on all of this is this shock has its real income shock for Australia and the world,” she said.

“Australians are poorer because of this shock to oil prices and energy prices and all the other commodity prices that are being impacted.

“So we are poorer and there is no way out of that.

Banks are expected to quickly pass on the increase, with Macquarie Bank being the first major lender to announce it was following the RBA.

Canstar.com.au analysis shows the RBA’s increase will add around $91 to the monthly repayments of a $600,000 mortgage with 25 years remaining.

Across all three hikes, it totals an extra $272 a month.

“If the cash rate remains steady from here on in, households could end up forking out an additional $3300 in repayments in the next 12 months, compared to if there had been no hikes in 2026,” Canstar data insights director Sally Tindall said.

“That’s effectively like paying nearly a whole extra month in a year.”

Chalmers points finger at US-Iran

Treasurer Jim Chalmers blamed the US-Iran war for the latest surge in inflation.

“We know that some of the costs and consequences of this conflict on the other side of the world are that Australians are paying more, particularly for fuel, in that most recent inflation data,” he told reporters in Canberra.

“Next week the budget will be handed down one week from today and it will be a really responsible budget.

“We will save more than we spend.

“We will bank all of the upward revisions to revenue, and that’s because we recognise that even though the budget is not the primary driver of prices in our economy or these interest rate decisions, we intend to play a helpful role, not a harmful role in the fight against inflation.”

Australia's Cash Rate 2022

‘Bitter pill” for households

Marc Jocum, senior product and investment strategist, Global X ETFs, said inflation was still not where the RBA needed it to be, thanks to government and bank policies and the US-Iran war.

“Many households may feel like innocent victims in this inflation battle, given this price surge was not purely created by consumer excess, but perhaps a concoction of an RBA stop-start policy reversal, reckless government spending, global supply shocks and the oil price surge flowing through from conflict in the Middle East,” Mr Jocum said.

“But unlike traditional medicine that delivers immediate relief, the RBA’s remedy comes with harsher side effects.

“Higher mortgage repayments, slowing house prices, weaker consumer spending and rising unemployment risks are now becoming part of the economic prescription.

“The central bank is effectively asking households to absorb more pain today to avoid something worse later on, as entrenched inflation could become far harder to cure.”

Deloitte Access said the rate rise “was all but inevitable”, and warned worse may be coming.

“Australians have now faced three consecutive rate hikes, unwinding the easing delivered in 2025 and returning the cash rate to post-pandemic highs,” partner Stephen Smith said.

“There is now a credible risk that rates could rise to levels not seen for around 15 years.

“At the same time, the latest Statement on Monetary Policy, also released today, reveals that the RBA has further downgraded its medium-term growth outlook to just 1.4 per cent – a historic low.”

He said next Tuesday’s federal budget will be critical.

“The government will need to demonstrate a genuine commitment to fiscal discipline and structural reform, rather than relying on broadbased, short-term cost-of-living measures that may provide temporary relief while adding to medium-term inflation persistence,” he said.

“Without reforms that lift productivity and expand supply-side capacity, an economy that was already operating near capacity before the Middle East conflict is likely to remain constrained. “In that environment, inflationary pressures will be more difficult to contain, and the risk of further monetary tightening will remain elevated.

“Similarly, if public spending continues to support aggregate demand at current levels, the burden on monetary policy is likely to increase.”

RBA releases grim forecasts for economy

Also on Tuesday, the RBA released its latest quarterly update, described by one economist as “bleak reading”.

In a grim outlook, in its latest Statement of Monetary Policy the bank has downgraded its expectations across the board, as the Middle East crisis hits the national economy,” Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

“ … it makes for bleak reading: inflation and unemployment are forecast to peak higher, while spending, investment and overall GDP growth will be weaker,”

“In essence, everything is moving in the wrong direction.

“What happens next for rates largely depends on the Strait of Hormuz.”He said the longer the Strait remained closed, the fewer options the board would have.

“A prolonged closure would force the RBA’s hand to hike rates multiple times this year to tame inflation and inflation expectations.”

The Reserve Bank modelling shows interest rate pain, below inflation wage growth and an overall slowing national economy.

Under its baseline assumption – which is aided by market expectations – the central bank is worrying about forecasting a further 60 basis points of interest rate pain.

At the same time, the RBA expects cost-of-living will continue to climb, with headline inflation expected to peak at 4.8 per cent in the June quarterly.

But offsetting this is an uptick in wages growth over the near term stemming from energy price rises and a tight labour market.

“We expect that short-term inflation expectations will be a consideration in wage bargaining in the near term as workers seek to preserve real wages,” the RBA said.

Wages growth will be expected to moderate over the longer term as unemployment ticks higher.

The RBA also modelled two adverse scenarios – both based on a prolonged US and Iran war – with underlying inflation could peak closer to 5.2 per cent, while the unemployment rate would jump to 5.1 per cent due to slowing economic activity.

Gross domestic product is also expected to stall under the more adverse scenarios although the RBA is not predicting a recession.

Under both these adverse scenarios, the critical Strait of Hormuz – where around 20 per cent of the world’s oil passes through – remains shut leading to a “very sharp” near term rise in energy prices.

Despite the US and Iran war, the Reserve Bank still predicts inflation to return to the midpoint between 2 and 3 per cent by June 2027.

“From mid-2027 onwards, the expected decline in fuel-related costs puts downward pressure on the quarterly rate of inflation,” the RBA wrote.

“However, there is a high degree of uncertainty around the intensity and breadth of cost pressures resulting from the conflict and the degree of pass-through to final consumer prices.”

Economists had expected hike

Westpac chief economist Luci Ellis earlier said she expected rising inflation would force the RBA to lift the cash rate.

“Together with the spike in both consumer inflation expectations and business survey measures of costs and prices, the March inflation data will have the RBA’s inflation warning lights flashing bright red,” she said.

The RBA’s decision to lift rates follows Australian Bureau of Statistics figures that show inflation rose by 4.6 per cent in the 12 months to March 2026 – Australia’s highest inflation since September 2023 when the nation’s economy was rebounding after Covid-19.

The price of petrol soared 32.8 per cent in March, lifting the cost of transportation by 9.2 per cent in just 30 days.

Oil prices have climbed since the US/Israel and Iran conflict started on February 28 and led to the blockage of the critical Strait of Hormuz, where 20 per cent of the world’s oil passes through.

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HSBC chief economist Paul Bloxham said the central bank had no choice but to take a sledgehammer to the national economy.

“With only a blunt instrument, the RBA has few options. The RBA is wielding its sledgehammer and knocking the economy into a downturn to disinflate it,” he said.

Ms Ellis, who was an RBA economist for more than three decades, said how many times the RBA would lift rates largely depended on the US-Iran war, which started on February 28.

“The outlook for the cash rate beyond May is necessarily less certain. We hold to our base case that there will be two further rate hikes after May, in June and August,” she said.

“The RBA’s experience last year, when underlying inflation popped back up almost immediately after it cut rates, will have nudged some within the RBA to the idea that the cash rate needs to be higher than its previous peak to really get inflation under control.”

More to come