RBA interest rates: Reserve Bank hikes official cash rate to 4.35% in blow to mortgage holders

The Reserve Bank governor has said surging oil prices in the wake of the US-Israel war on Iran have made Australians poorer with “no way out,” after handing down an interest rate rise and warning more hikes could be needed.

A week out from the federal budget, Michele Bullock also warned inflation would get worse if governments’ cost-of-living relief was not “targeting where it’s most needed”.

In a widely expected decision, the RBA lifted the cash rate on Tuesday to 4.35%, from 4.1%, with the central bank forecasting the move would add to intensifying cost-of-living pressures and slow the economy further.

The fallout from the US-Israel war on Iran was expected to slash half a percentage point off economic growth in 2026 against the pre-conflict forecasts in February, as annual growth halves to 1.3% this year.

The stagflationary effect of the oil supply shock would come through a higher peak in inflation, with consumer price growth forecast to reach 4.8% in the year to the June quarter, versus a prewar estimate of 4.2%.

Bullock said the oil price spike from the war would send prices soaring regardless of interest rate efforts.

“We are poorer and there is no way out of that,” she said.

“These interest rate rises are not going to do anything for inflation in the next six months. That’s done and dusted.”

Rate rises were instead aimed at keeping control of local businesses’ price hikes and workers’ wage claims, Bullock said.

“These second round effects could lead to even higher and persistent inflation, and if so, would require even more tightening in monetary policy,” she said.

Eight of the RBA’s board members voted for the increase but one voted to leave rates on hold. Bullock said “one reason for deciding to increase interest rates [was] to give ourselves space now to sit and see what happens”.

A week out from what the treasurer, Jim Chalmers, is simultaneously calling his most ambitious and responsible budget yet, the RBA’s decision will deliver a blow to the more than 3m mortgaged households.

Bullock, who has historically refrained from commenting on government spending, said on Tuesday governments could help fight inflation by limiting their spending.

“The extent to which government make up the shortfalls for households by giving them more money, it makes it harder to dampen demand,” Bullock said.

“It has to be careful, I guess, in the sense that it needs to be targeting where it’s most needed. . … You can’t just go out there and add to demand.”

Chalmers said the budget would respond to the inflation challenge but added government spending was not the main reason for price pressures.

“We intend to play a helpful role, not a harmful role, in the fight against inflation,” he said.

The shadow treasurer, Tim Wilson, said the government’s failure to cut spending was already adding to inflation.

“While Australian households are being told to pull their belt in, the Albanese government seems disinterested and unwilling,” Wilson said.

The RBA on Tuesday also updated its forecasts for the Australian economy. In its baseline, which assumes a relatively rapid end to the Middle East conflict, Australians would suffer another year of falling living standards, as prices rise faster than pay packets.

The hit to growth would not see a short-term surge in unemployment, with the jobless rate expected to be at a relatively low 4.3% by the end of this year.

The RBA also explored two “adverse” scenarios involving a more extended conflict that leaves oil prices higher for longer.

Under the more extreme version, unemployment was forecast to push above 5% as the economy slows more sharply.

Even under this more pessimistic scenario, however, the country escapes recession, according to the forecasts, although the RBA said it did not attempt to model what would happen were Australia to run short of fuel.