RBA hikes rates to 4.10 per cent as banks predict more pain ahead

Reserve Bank governor Michele Bullock has warned a recession is possible if inflation cannot be brought down, after announcing another rate increase on Tuesday.

“We don’t want to have a recession, but if it’s hard to get inflation down, then you know, we’re going to have to deal with that possibly,” Ms Bullock said.

She said that was why the monetary policy board was so focused on reining in inflation to return it to the target range of 2-3 per cent, from the 3.8 per cent it was sitting at now.

“The bottom line is that in the end, if we don’t have low and stable inflation over time, we won’t have full employment,” she said.

“It doesn’t work like that.

“(The) best contribution we can make to full employment and in fact to things like investment and productivity and so on is to have low and stable inflation.

“So we do need to keep our eye focused on that ball.”

Following its two-day meeting, the central bank – in a split decision – lifted the official cash rate by a further 25 basis points to 4.1 per cent.

Rates were also increased from 3.6 to 3.85 per cent in February.

Australia’s cash rate is now at its highest point since April 2025.

The widely anticipated increase means Australian families will need to find extra room in already tight household budgets to cover higher monthly home loan repayments.

Board split on decision

Only five of the nine monetary board members voted for the 25 basis points increase, while four voted to keep the cash rate on hold.

In a statement, the Reserve Bank board said inflation pressures picked up materially in the second half and rates needed to rise to slow inflation and expectations of rising costs in the economy.

“We had a very robust conversation over the past two days about whether we should hold until May,” governor Michele Bullock told reporters after the announcement.

“This would have given us an opportunity to consider more data on inflation in the labour market, and it would also have perhaps provided a bit more clarity on the potential impact of the conflict in the Middle East.

“But the discussion was very much centred around the timing of a rate increase.

“All members agreed that another rate increase was needed to address domestic inflationary pressures.”

Iran conflict an issue

Ms Bullock told her press conference that the rate increase was needed to address the ongoing inflation issue, which may worsen thanks to the Iran conflict.

“We can’t do anything about the inflation rate that’s going to pop out in the next few quarters,” she said.

“If the current oil price is sustained, that will just be what will be.

“But what we might be able to do – and what we’re hoping to do – is bring the excess demand down so that as that washes through, we’ll end up with less pressure on the second round effects.”

She said there could be “some really bad outcomes for the world economy if the current conflict gets worse”.

“So those are the sorts of things we’re going to have to consider, so I can’t give commitments one way or the other,” she said when asked if rates could rise again this year.”She said the RBA had done some modelling on the impact on inflation of “just very first round pass through of petrol price rises”.

“But we haven’t done any modelling on potential impacts if the war goes on and there’s continued,” she said.

“So that’s something obviously we’re looking at; I think Treasury is looking at as well.

“But we haven’t done anything on that yet.”

Concern as consumers continue to spend

Ms Bullock said Australians are continuing to spend despite faltering consumer confidence.

“It all depends on how confidence flows through into what people actually do in terms of spending,” she said.

“Confidence has been low for some time, but the consumers have been continuing to spend.

“So, yes, we look at consumer confidence, but ultimately what matters is what people actually do and that’s what matters for demand.”

She also said predictions the RBA is yet to see any impact from AI on the unemployment rate, despite recent high-profile lay-offs in the tech industry, raising “doomsday” predictions.

“We’re not seeing it show up in things like the forward looking indicators like vacancies, job openings, lay-offs, those sorts of things,” she said.

“That’s something that has to be addressed more by government policies and how to retrain people.”

‘Global risks very substantial’: Chalmers

Federal Treasurer Jim Chalmers said Tuesday’s decision was “unsurprising”, but would still hit households hard.

“We say to Australians around the country who are hearing about this news of an interest rate increase, who dealing with some of these global pressures at the petrol bowser, that we know that those pressures are real,” he told reporters in Canberra.

“ … we will do what we responsibly can to respond to them.”

He said the government had been addressing cost-of-living relief, which included tax cuts and cheaper medicines.

He said the Middle East conflict was a significant issue.

“The impacts of what we’re seeing in that part of the world are already substantial, but we don’t know yet how enduring those very substantial economic pressures will be,” he told reporters.

Shadow treasurer Tim Wilson said Mr Chalmers was in “denial” about its role in the inflation fight.

“It’s clear that the government is ignoring the spending that it is contributing to inflation,” Mr Wilson said in Melbourne.

Middle East fears drove rate decision

The Reserve Bank board also confirmed the conflict in the Middle East added more challenges for the central bank to get inflation back to the target rate of 2-3 per cent.

In the nearly three weeks since the US/Israel and Iran conflict began, the price of oil has surged from $US56 ($A80) a barrel to more than $US100 ($A142) a barrel.

Every $10 a barrel added is about 10 cents a litre households pay at the petrol pump.

“In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation,” the board said.

“Short-term measures of inflation expectations have already risen.

“As a result, the board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.”

In its statement on monetary police released at its February meeting, the RBA predicted inflation would fall back to the target range by mid-2027 at the earliest.

Australia's Cash Rate 2022

Low interest rates ‘over’

KPMG chief economist Brendan Rynne says the decade of low interest rates could be over.

“We know the last tightening cycle put considerable pressure on households and the impact will be no different this time around and there could be more to come,” he said.

Mr Rynne warns households will be left exposed to the dual pressures of rising oil prices at the same time their mortgages will rise.

“It would be naive to pin today’s rate rise solely on the Middle East conflict. Even prior to this, the economy was vulnerable to another rate rise, with inflation projected to be above target for some time,” he said.

“Put simply, the inflation genie never quite got back in its bottle, and the RBA is now having another go.”

What mortgage holders will pay now

According to Finder, the now back-to-back rate hikes will cost those with a $500,000 mortgage an extra $159 a month, based on a 5.51 per cent starting rate.

Households owing $750,000 will need to find an additional $238 a month, while those owing the bank $1m will be paying $318 more a month.

Adding to households’ woes are rising fuel costs, which are trickling through the economy and raising the cost of living.

Treasury forecasts headline inflation will jump to the “high fours” due to the conflict between the US and Iran, well above the RBA’s target rate of 2-3 per cent.

The price of petrol and diesel has spiked sharply – by about 50 cents a litre on average – further worsening the already high cost of living, and there are major shortages of fuel in more remote parts of the country.

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Westpac chief economist Luci Ellis – who previously worked for the RBA for more than three decades – says the central bank will lift interest rates in March and May, even if the impact of rising oil prices is temporary.

“This is a once bitten, twice shy situation,” Ms Ellis has told NewsWire.

“They’ve (the RBA) made it clear they want to get on with it and when they get the Q1 inflation data, on our estimates, it will be too high.”

All four major banks predict interest rates will also be lifted in May, taking the cash rate to at least 4.30 per cent.

If the prediction is accurate, all three rate cuts in 2025 will be undone in three consecutive meetings after the RBA began lifting the cash rate from February.

While economists are focusing on three interest rate hikes in a row, the bond market is pricing in more pain for borrowers.

It predicts four rate hikes between now and the end of the calendar year.