RBA interest rates: Reserve Bank raises official cash rate to 4.1% in blow to mortgage holders | Reserve Bank of Australia
The Reserve Bank has raised interest rates amid a global energy shock that threatens to push Australian inflation towards 5% in a split decision, leaving the door open to further increases.
The increase takes the RBA’s cash rate target from 3.85% to 4.1%, back to where it was in February 2025, and removes the relief provided by two cuts last year.
Five members of the bank’s monetary policy board voted to raise interest rates, while four voted to keep them steady; This marks the narrowest call since July, when the RBA began announcing the votes.
Household budgets, already under pressure following February’s rate hike and rising oil prices, will face higher mortgage costs.
A household with a $600,000, 25-year mortgage (about the average size of a new mortgage) will see their weekly repayments increase by another $91 per month when their bank approves the increase.
The growing conflict in the Middle East has triggered fears of fuel shortages and increased price pressures around the world, forcing global central banks to prepare for higher interest rates.
While the Reserve Bank of Australia is the only institution expected to raise interest rates so soon, central banks in the US, UK, European Union, Japan, Canada, Switzerland and Sweden are expected to keep interest rates steady this week.
Even before the US struck Iran, Australia’s inflation had already risen to 3.8%; This was well above the bank’s target of 2-3%.
In a statement accompanying the decision, the RBA board said inflation could remain high for longer than previously expected because the labor market and the wider economy were now hotter than the bank thought.
In the statement, “The Board evaluated that inflation will remain above the target for a while and the risks are tilted even higher.” The statement was included.
The economy is growing at the fastest pace in almost three years and unemployment has fallen since September.
The RBA board warned in a statement that conflicts in the Middle East could cause prices to rise in the short term and risk raising Australians’ expectations of high inflation.
“Developments in the Middle East remain highly uncertain, but a wide range of possible scenarios may increase global and domestic inflation,” the statement said.
The board left the door open to further rate hikes, stimulus credit was still easy to access, and it was not clear that rate hikes restricted borrowing.
“Financial conditions have tightened somewhat this year, but the extent to which monetary policy remains restrictive is unclear,” the RBA board said.
However, markets turned to further interest rate hikes after the board’s split decision and both sides acknowledging the risks. The ASX200 jumped 0.2% and the Australian dollar fell from 70.8 US cents to 70.55 US cents.
Finance Minister Jim Chalmers acknowledged in a statement that the conflict in the Middle East had made the inflation problem worse, but said “this will be really difficult news for millions of Australians with mortgages”.
“At a time of intense global instability, this will put even more pressure on families and businesses,” the Finance Minister said.
KPMG’s chief economist Dr. Brendan Rynne said rising economic activity in Australia meant “it would be naive to attribute today’s interest rate rise solely to the Middle East conflict”.
“Even before this, the economy was vulnerable to another rate hike,” Rynne said.
“Simply put, the inflation genie was never quite back in its bottle and the RBA is now giving it another go.”
But some economists have warned that the RBA should keep interest rates steady due to fears of a decline in consumer spending.
AMP economist Shane Oliver wrote ahead of the meeting that household spending was already slowing and rising oil prices would further constrain spending, but potentially provide only a temporary boost to inflation.
“It is reasonable to expect at least some of the dust from the Iran war to settle because the war could be over within a month and any increase in inflation due to higher oil prices could lead to a short-term decline,” Oliver said.
ANZ’s weekly consumer confidence survey revealed on Tuesday morning; households are in the bleakest situation since the start of the Covid-19 pandemic in early 2020.
International conflicts, oil prices and interest rate hike fears have seriously damaged Australians’ confidence in the economy, according to ANZ economist Sophia Angala.
RBA governor Michele Bullock will announce the decision at 3.30pm (AEDT) in Sydney.
