The Reserve Bank of Australia (RBA) on Tuesday raised its benchmark interest rate by a quarter point for a third straight month, in line with the consensus view, citing a material pickup in inflationary pressure.
The Australian dollar, which was lower against its U.S. counterpart ahead of the rate decision, recouped its losses after the verdict. The AUD/USD pair was seen last trading at flattish at 0.7165
RBA Worried About Inflation Pick-up
The Monetary Policy Board, led by Governor Michele Bullock, decided to increase the Cash Rate target, which is the interest rate on unsecured overnight loans between banks, by 25 basis points (bps) to 4.35%. The decision was adopted by an 8-1 margin, with the one dissenter arguing for a pause.
The board blamed the higher fuel and related commodity prices resulting from the Middle East conflict, along with early signals of companies passing on cost pressures to consumers for its hike. It also noted that short-term measures of inflation expectations have also risen.
The central bank had kept rates largely unchanged since December 2023, with only two quarter-point cuts announced in the interim.
The central bank felt inflation had picked up materially since the second-half of 2025, reflecting the impact of the Middle East conflict on global energy prices. Since the intensification of the conflict between the U.S. and Iran on February 28, Brent crude oil futures have climbed nearly 58%.
The Australian dollar, being a commodity currency, will likely appreciate if energy prices stay inflationary. The consumer price inflation (CPI) data released last week showed a pick-up in the annual rate to a three-year high of 4.6% in March from 3.7% in the previous month. Transport (up 8.9%), housing (up 6.5%) and food and non-alcoholic beverages (up 3.1%) were the biggest contributors to the spike. The monthly inflation rate picked up to 1.1%.
Australia CPI (Annual and Monthly Rates)
Source: Australian Bureau of Statistics
Commonwealth Bank of Australia (CBA) noted that the trimmed mean inflation figure, the RBA’s preferred inflation measure, climbed 0.8% quarter-over-quarter in the March quarter, and 3.5% annually, well above the 2%-3% central bank target. CBA Senior Economist Trent Saunders said, “Market services price growth is still too high, and domestic price pressures remain firm ahead of the full pass-through of higher transport and material costs from the war in Iran.”
Outlook Clouded by Uncertainty
The central bank said it expects underlying inflation to peak at higher than was expected in February, provided the Iran conflict resolves soon, and then decline as demand growth slows and capacity pressures ease in response to higher interest rates.
“This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy,” RBA stated.
It also noted that financial conditions have tightened, with money market interest rates and government bond yields having risen, and the exchange rate appreciating. But credit is readily available to both households and businesses, it added.
The central bank also pointed to materially heightened uncertainties about the outlook for domestic economic activity and inflation.
Rate Outlook
CBA expects the RBA to pause after May due to higher rates, elevated energy prices and softer confidence. That said, the bank hinged any rate move on the length of the Iran conflict, the resilience of consumers and the strength of the labor market.
The spotlight shifts to governor Bullock’s press briefing due at 1:30 a.m. ET. Traders look forward to guidance on the June 15-16 meeting, any softening in language around further tightening, and commentary on household mortgage stress.
