RBA raises rates to 4.35%

Australia’s central bank just made mortgages, business loans, and credit a bit more expensive again. The Reserve Bank of Australia lifted its cash rate to 4.35% on May 5 after deciding inflation was no longer easing fast enough. The immediate problem is simple — prices were already running hot, then higher fuel and commodity costs made the outlook worse. So the RBA chose to lean harder against demand rather than risk inflation getting embedded. (rba.gov.au) ### What did the RBA actually do? The board raised the cash rate target by 25 basis points, taking it to 4.35%, with the new setting effective May 6. That is the main policy rate in Australia, and it flows through to variable mortgages, business lending, deposit rates, and broader financial conditions. The RBA’s own site lists 4.35% as the current target and says the next scheduled update is June 16. (rba.gov.au) ### Why now, not later? Because the bank thinks inflation re-accelerated. In its May 5 decision, the RBA said inflation “picked up materially” in the second half of 2025, and data from early 2026 suggested some of that reflected stronger capacity pressures inside the economy — basically, demand and cost pressure were still running too hard for comfort. That means this was not just a(rba.gov.au) was a judgment that underlying inflation pressure had broadened. (rba.gov.au) ### Why does the Middle East show up here? Energy is the transmission channel. The RBA said the conflict in the Middle East had already pushed up fuel and related commodity prices, and those increases were feeding into inflation. The catch is that petrol is only the first-round effect. Once transport, logistics, and input costs rise, firms often try (rba.gov.au)also flagged rising short-term inflation expectations, which is exactly what central banks hate to see. (rba.gov.au) ### What does “capacity pressure” mean? It means the economy is still bumping into limits — workers, services, transport, housing, all the stuff that gets tight before inflation fully cools. When the RBA talks about capacity pressure, it is saying demand has not slowed enough relative to supply. That matters because inflation driven by domestic bottl(rba.gov.au)t fix that with cheaper oil later. You usually need slower spending. (rba.gov.au) ### Is this just about headline inflation? No — and that is the important bit. The RBA’s baseline forecast assumes the Middle East conflict resolves soon and fuel prices fall back, but even under that friendlier scenario it still sees underlying inflation peaking higher than it expected in February. In other words, the bank is not treating this as a (rba.gov.au)nger than it thought a few months ago. (rba.gov.au) ### What happens to households now? Borrowers are the first people to feel it. Variable-rate mortgage holders can face higher repayments, and new borrowers get tested against tougher financing costs. But the RBA is making a trade-off here — short-term pain now versus a longer stretch of inflation later. Michele Bullock’s broader message has been that(rba.gov.au) and savings lose purchasing power. AFR’s reporting says the vote was 8-1, which suggests the board saw a clear case for moving. (afr.com) ### Does this mean more hikes are coming? Not automatically. The RBA did not pre-commit to another move. It said it would watch the data and the evolving risks. But the tone was plainly hawkish — inflation is likely to stay above target for some time, and the risks are still tilted upward. Markets and borrowers should read that as: one hike happened, and the bar for cuts just got higher. (rba.gov.au) ### Bottom line This was the RBA deciding that inflation risk had become too broad to ignore. A fuel shock lit the match, but the bigger worry is that price pressure was already proving stubborn. At 4.35%, policy is now tighter again — and unless inflation cools convincingly, relief for borrowers probably gets pushed further out. (rba.gov.au)