Inflation’s Snail-Pace Decline Prompts Third Rate Rise

The Reserve Bank of Australia has lifted the official cash rate by 25 basis points to 4.35 per cent, citing persistent inflation and ongoing capacity pressures in the domestic economy.

The central bank’s monetary policy board said inflation remained above target and was expected to decline more slowly than previously forecast, prompting the latest increase.

The board said global economic conditions remained uncertain, with geopolitical tensions in the Middle East identified as a key risk to the outlook.

It noted that ongoing conflict in the region had contributed to volatility in global energy markets, with the potential to drive higher fuel and transport costs.

The RBA said any sustained increase in oil prices linked to Middle East instability could add to inflationary pressures globally, including in Australia.

The bank also warned that an escalation in tensions could disrupt supply chains and weigh on global growth, further complicating the inflation outlook.

This is the third rate rise for 2026, after increases in February and March as the bank resumed tightening after earlier easing in 2025.

In February, the board lifted the cash rate to 3.85 per cent, before raising it again to 4.1 per cent in March as inflation pressures persisted.

The RBA said risks to inflation had tilted to the upside, particularly across services and housing-related costs, reinforcing the need for further policy action.

Back to where we were

The board pointed to continued strength in the labour market and broader economic resilience as factors supporting its decision.

It said capacity constraints in the economy, alongside elevated demand, were contributing to persistent price pressures.

The RBA reiterated that its priority remains returning inflation to its 2 to 3 per cent target band over the medium term.

It said future policy decisions would be guided by incoming data, including inflation outcomes, labour market conditions and global economic developments.

The central bank also signalled it remains prepared to adjust policy further if required to ensure inflation expectations remain anchored.

The board said it would continue to closely monitor developments in global financial markets, commodity prices and geopolitical risks as part of its ongoing policy deliberations.

Oliver Hume Property group chief economist Matt Bell said the market was “now exactly where we were before the three rate cuts began in February 2025, with a wide range of forecasts about the rest of 2026”.

But, he said, early signs were not as dire as initially feared. 

▲ Oliver Hume Property Group chief economist Matt Bell.

“We’re still seeing strong price rising in those already booming housing markets of Perth, Brisbane and Adelaide, and even in Sydney and Melbourne, where prices are easing, they’re still rising in the most affordable suburbs,” Bell said.

“In the land space, March quarter volumes eased in those overheated markets, but this was because of supply constraints, with demand holding up well as indicated by strong price rises. 

“Other indicators have also held up.  Auction clearance rates and consumer sentiment are up off the lows seen at the start of the Middle East crisis. New home sales rose in March, and unemployment has held steady at historically low levels.

“Clearly the outlook for property in 2026 is worse than it was before the crisis began, but with fuel prices well below their March peaks and supply largely sorted for Australia, it seems it will be a stabilisation in rate expectations that will settle the market before returning to normal activity in late 2026 or 2027.”

REA Group Senior Economist, Anne Flaherty said with inflation expected to remain elevated, there was a strong possibility that interest rates could move even higher in 2026.

“For mortgage holders on variable rates, this will add further pressure to already stretched household budgets,” she said.

“Higher interest rates are also reducing borrowing capacities which is already placing downwards pressure on home prices.

“National home prices slipped 0.1 per cent in April and higher interest rates will add further downwards pressure to prices”.

Budget role now more critical

Housing Industry Association chief economist Tim Reardon said while the RBA’s actions reflected the persistence of price pressures across the economy, “higher interest rates increase the cost of financing new homes and make it more difficult to bring new housing projects to market”.

“As a result, this decision is likely to reduce the number of new homes commencing construction at precisely the time Australia needs more housing supply,” he said.

Reardon said the rate rise came just a week before the Federal Government hands down the Budget, which will play a critical role in determining whether Australia can meet its housing supply challenge.

“That places greater responsibility on the Budget to lower the cost of building new homes and ensure that supply is not further constrained,” he said.