The Reserve Bank of Australia (RBA) has lifted the official cash rate by another 25 basis points, the third hike this year as it struggles to keep inflation under control.

The increase takes the cash rate to 4.35%, and fully reverses the three rate cuts delivered in 2025. The hike had been widely expected by economists after a sharp rise in inflation figures last week. RBA Governor Michele Bullock told a media conference:

Inflation in Australia was already too high before the recent conflict in the Middle East began. We must get on top of inflation now so it doesn’t get get away from us.

Why the RBA moved

The reason is clear: inflation is too high. The latest figures showed annual consumer price inflation rose to 4.6% in March, up from 3.7% in February.

The jump was driven heavily by higher fuel prices triggered by the war in Iran, which began on February 28.

The RBA cannot simply dismiss this as a temporary oil price shock. Its preferred measure of underlying inflation, the trimmed mean, was still 3.3% in March. That is above the RBA’s 2–3% target band. It suggests price pressures are not only coming from petrol prices, but are spreading across parts of the domestic economy.

As the RBA noted in its post-meeting statement,

Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly.

This is why the RBA acted. Higher interest rates will not produce more oil, bring down global shipping costs, or end geopolitical conflict. But they can reduce demand in the economy and, just as importantly, signal that the RBA will not allow a temporary price shock to become a lasting inflation problem.

The increase will add about $100 to monthly repayments on the average new mortgage loan of A$700,000.

Another split vote

The decision was again split, with eight members voting to raise the cash rate and one voting to keep it unchanged. “We had a lot of debate,” Bullock said.

The 8–1 vote shows there was a strong majority in favour of acting on inflation, but not complete agreement. Most members appear to have judged that the risk of inflation staying above target outweighed the risk of weaker growth.

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The policy dilemma: rising inflation, slowing growth

The move comes just a week before the federal budget, with reports the government is considering further cost-of-living support with an “earned income offset” for wage earners of $200 to $300.

The potential extra spending adds to the policy dilemma facing the RBA: inflation is rising, but the economy is likely to slow. And consumer confidence has collapsed to recessionary levels, risking a further slowdown in spending.

In the worst case, Australia could face a mild form of stagflation – a situation where inflation remains too high while economic growth weakens. This is one of the hardest environments for a central bank to manage.

When inflation is high because the economy is growing too strongly, the solution is more straightforward. Higher interest rates cool demand, slow spending and help bring inflation down.

But today’s problem is more complicated. Higher interest rates will not ease the oil supply shock. They can only work by slowing domestic demand.

That means the RBA faces a difficult trade-off. If it does too little, inflation could stay high for longer and expectations could become harder to control. But if it does too much, it risks pushing the economy into a sharper slowdown or even a recession.

This tension was clear in the RBA’s assessment of the outlook:

Australian GDP growth is forecast to be a little lower than previously expected due to higher fuel prices and the assumed higher path for interest rates.

Inflation to stay higher for longer

The updated quarterly forecasts released with today’s decision underline this difficulty.

In February, before the war began, the RBA expected headline inflation to peak at 4.2% and underlying inflation to peak at 3.7% in June.

It now expects headline inflation to peak at 4.8%, with underlying inflation reaching 3.8% at the same time.

This upward revision means the RBA is no longer looking at a gradual return of inflation to the target band. It is now dealing with a renewed inflation shock, on top of domestic price pressures that had not yet fully disappeared.

The risk is that higher fuel prices feed into broader prices and wages. If that happens, inflation could become harder to bring down, even after the original shock fades.

That is why the RBA has moved again. It wants to prevent a temporary global price shock from turning into a more persistent inflation problem.

What it means for households and government

The RBA’s message is uncomfortable but clear. It is prepared to accept a weaker economy and a softer labour market if that is what is needed to return inflation to target.

For households, the rate rise will increase repayments for borrowers on variable-rate mortgages and put more pressure on household budgets.

For the government, it means fiscal policy needs to be careful in next week’s budget. Any cost-of-living support must be designed in a way that helps vulnerable households without adding too much extra demand to the economy.

The narrow path ahead

Today’s decision was not an easy one. The RBA is trying to stop a temporary global shock from becoming a permanent inflation problem.

But the more it raises rates, the greater the risk that the economy slows more sharply than expected.

That is the narrow path the RBA is now walking: doing enough to control inflation, without doing too much damage to growth.

Stella Huangfu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Australia’s inflation rate surged 1.1% in March, driven by a record jump in fuel prices, making an interest rate hike next Tuesday more likely.

The consumer price index (CPI), released today, rose to 4.6% in the year to March, the first major economic indicator to show the impact of the war in the Middle East.

A measure of underlying inflation – the annual “trimmed mean” – came in at 3.3%. This measure is closely watched by the Reserve Bank of Australia (RBA) and is also above its 2–3% target band.

For the RBA, which meets next week to decide on interest rates, the message is clear: inflation is moving in the wrong direction again, and quickly.

This is not a normal inflation shock. It is being driven by a sharp rise in global energy prices following the war in the Middle East.

Higher interest rates will not bring down global oil prices. But they can help prevent a fuel shock from becoming a broader and more persistent inflation problem.

Fuel prices are just the beginning

The immediate driver of the March inflation surge is fuel.

Global oil prices have risen sharply, pushing up petrol and diesel prices at the pump.

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The Australian Bureau of Statistics said fuel prices jumped 32.8% in March – “the largest monthly increase since the series began in 2017”.

This feeds directly into CPI, making it one of the fastest channels through which global shocks affect domestic inflation.

But fuel is only the first-round effect. The bigger concern is what comes next. Higher fuel costs raise transport costs across the economy. Businesses then face a choice: absorb the increase, or pass it on to consumers.

Some will try to absorb it at first, especially if consumers are already cutting back. But margins cannot be squeezed indefinitely. Over time, more of these costs are likely to be passed on in the form of fuel surcharges and show up in final prices.

This is how a temporary shock can turn into persistent inflation.

Higher costs for businesses

The March CPI largely captures the initial impact of the oil shock. The second-round effects – where higher costs spread more broadly – take time.

These effects are already beginning to appear. Businesses are facing higher operating costs, not just from fuel but also from supply disruptions and rising input prices. As these pressures build, price rises can spread beyond petrol and transport.

Even if oil prices stabilise, the earlier jump in fuel costs will continue to flow through the economy. Transport costs affect food, retail, construction and many services. Airlines, delivery firms, supermarkets and builders all face higher costs when fuel prices rise.

That means inflation could remain elevated for some time, even if the initial shock fades.

A broader view of inflation

While the monthly CPI attracts attention, the RBA still places weight on the quarterly CPI.

The March quarter figures give the RBA a broader read on inflation than the monthly data. Annual inflation in the March quarter was 4.1%, while annual trimmed mean inflation was 3.5%.

The quarterly figures show inflation has been building even before the February 28 start of the war in Iran. It points to broader price pressures, making the case for a rate rise stronger.

The economy also takes a hit

The fuel shock is not only an inflation problem. It is also a growth problem.

Higher petrol prices reduce household purchasing power, leaving less money for discretionary spending. That weighs on retailers, restaurants, travel businesses and other parts of the economy that depend on consumer spending.

For businesses, higher fuel and transport costs raise production costs. Some may delay hiring or investment. Others may lift prices and risk losing customers.

This is the difficult part for the RBA. A fuel shock pushes inflation up while also weighing on economic activity. This creates a risk of stagflation, when inflation stays high even as growth slows. That makes the RBA’s policy decision much harder.

But if business and consumer expectations about future inflation start to rise, the damage could last well beyond the current shock.

If businesses expect costs to keep rising, they are more likely to raise prices. If workers expect inflation to stay high, they are more likely to seek larger wage increases. This can turn a one-off shock into a more persistent problem.

The RBA will want to avoid that. That is why the bank is likely to act at its May 4-5 meeting.

Why a rate rise now?

The case for a third rate rise (following three cuts last year) is not that the RBA can reverse the fuel shock. It cannot.

The case is that inflation was already too high before the latest shock, and today’s CPI figures suggest the return to its 2–3% target will take longer than expected.

Market pricing already points in the same direction. The ASX RBA Rate Tracker shows that, as of April 28, markets were pricing a 76% chance of a rate rise to 4.35% next week.

Today’s CPI figures make that pricing look more justified. A rate rise would signal that the RBA remains committed to bringing inflation back to target.

We’re at a turning point

The March CPI release marks a turning point.

It shows how quickly global shocks can feed into domestic inflation, and how difficult they are to contain once they begin to spread.

Fuel prices have lit the spark. The risk now is that the fire spreads through the broader economy. That is why the RBA is likely to raise interest rates next week.

Stella Huangfu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.