RBA Lifts Cash Rate to 4.35% as Inflation Risks Intensify
At its May meeting, the RBA increased the cash rate target by 25 basis points to 4.35%, its third rate increase this year.
The Board noted that inflation picked up materially in the second half of 2025, with recent data confirming that some of the lift reflected stronger capacity pressures in the economy.
Adding to this, the conflict in the Middle East has pushed fuel and related commodity prices sharply higher, with early signs that businesses facing higher costs are looking to pass these increases through to customers.
While the Bank’s baseline forecast assumes the conflict is resolved soon and fuel prices decline, the RBA warned that inflation is likely to remain above target for some time and that risks remain tilted to the upside.
Key Takeaways:
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- Cash rate increased: The RBA lifted the cash rate target by 25 basis points to 4.35%.
- Inflation is running above target, with headline CPI rising 4.6% annually in March.
- Capacity pressures: The RBA said the recent lift in inflation partly reflected “greater capacity pressures” in the economy, signalling demand remains stronger than supply.
- Middle East risk factor: The conflict in the Middle East has pushed fuel prices higher and introduces material uncertainty around global inflation and supply, both of which the RBA is watching closely.
- Global risks: Higher fuel prices from the Middle East conflict are adding to inflation and could create broader price pressures.
- Policy stance: The Board judged that a higher cash rate was needed to reduce the risk of inflation expectations rising further.
- Outlook: The RBA remains data-dependent and will continue watching inflation, domestic demand, the labour market and global financial conditions closely.
(Source: RBA)
Rate Expectations
(Source: ASX RBA Rate Tracker)
On the 5th of May the RBA increased the official cash rate by 0.25%. The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 4.35%.
The next RBA Board meeting and Official Cash Rate announcement will be on the 16th June 2026.
As at the 5th of May, the ASX 30 Day Interbank Cash Rate Futures June 2026 contract was trading at 95.63, indicating a 17% expectation of an interest rate increase to 4.60% at the next RBA Board meeting.
Inflation
(Source: RBA, ABS)
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Headline Inflation: Australia’s CPI rose 4.6% in the 12 months to March 2026, up from 3.7% in February and the highest annual inflation rate since September 2023.
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Underlying Inflation: Trimmed mean inflation was unchanged at 3.3% annually in March, still sitting above the RBA’s 2–3% target band and showing that underlying inflation remains sticky.
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Household Inflation (CPI): The largest contributors to annual inflation were Housing (+6.5%), Transport (+8.9%) and Food and non-alcoholic beverages (+3.1%). Automotive fuel was a key pressure point, rising 24.2% annually and 32.8% in March alone.
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RBA Stance & Outlook: The RBA expects inflation to remain above target for some time, with risks tilted to the upside. Higher fuel prices are already adding to inflation, and the Bank is concerned about second-round effects flowing through to broader goods and services prices.
Property Market Update
(Source: Cotality May HVI)
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Home value growth slows nationally. Australian home values rose 0.3% in April, the slowest monthly pace since January 2025. The result was dragged lower by Sydney and Melbourne, where values both fell 0.6% over the month.
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Markets remain highly diverse. Perth continued to lead with a 2.1% monthly rise, followed by Darwin (+1.3%), Brisbane (+1.2%) and Adelaide (+1.1%). National dwelling values are now up 9.8% annually, with Perth (+26.0%), Brisbane (+19.7%) and Darwin (+19.6%) still the standout performers.
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Higher rates and affordability are weighing on demand. Cotality noted that the housing market had already been losing momentum before the latest rate rise, with affordability and serviceability constraints weighing on demand. Capital city home sales over the past three months were 5.4% lower than a year ago and 7.4% below the five-year average.
Rental Market Update
(Source: Cotality May HVI)
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Rents continue to rise. National rents increased 0.6% in April and are now 5.7% higher over the year, adding approximately $38 per week to the national median rent.
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Vacancy rates remain extremely tight. The national rental vacancy rate held at 1.6% in April, with every capital city recording a vacancy rate of 1.8% or lower.
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Darwin leads rental growth. Darwin recorded the strongest annual rental growth, with house rents up 8.8% and unit rents up 9.8% over the year.
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Yields remain under pressure despite stronger rents. National gross rental yields sit at 3.6%, with combined capital city yields at 3.4% and combined regional yields at 4.2%.
What this means if you’re a borrower
For anyone with a variable rate home loan, this increase will flow through to repayments relatively quickly. If you’re on a fixed rate that’s due to expire soon, it’s worth understanding what your loan will look like when it reverts.
For those in the market to buy or refinance, the environment hasn’t fundamentally changed, but it does reinforce the importance of structuring your lending carefully. Borrowing capacity, loan structure, repayment buffers and lender selection all matter more when rates are elevated.
This isn’t a time for panic. It is a time for preparation.
If you’re unsure how this move affects your position, or you want to pressure-test your current loan structure, it’s worth having that conversation sooner rather than later.
Talk to the Azura team to get clear, tailored guidance on where you stand and what your options look like from here.
