RBA lifts rates as rising inflation expectations and global energy shock threaten price stability

The Reserve Bank has raised the cash rate by 0.25 percentage points, responding to renewed inflation risks and rising inflation expectations driven by higher global energy prices.

Inflation has remained stubbornly above the RBA’s target band, with headline inflation at 3.8 per cent and underlying inflation still elevated. More recently, escalating conflict in the Middle East has pushed oil prices sharply higher, increasing petrol prices and raising concerns that inflation could accelerate again.

The surge in fuel prices has already begun feeding into household expectations, with consumer inflation expectations rising to a three-year high. Rising expectations are closely watched by central banks because they can influence wage negotiations and pricing decisions across the economy.

While the initial shock to energy prices is global in nature, the RBA has acted to prevent temporary price increases from becoming embedded in broader inflation. Allowing inflation expectations to drift higher would risk prolonging the period of elevated inflation.

The domestic economy remains strong enough to sustain tighter policy. Economic growth strengthened late last year, supported by both household and government spending. Although global uncertainty has increased, underlying demand in Australia has remained relatively resilient.

The labour market continues to give the Bank room to act. Unemployment remains low and employment growth has continued, supporting household incomes and spending. With demand holding up and inflation pressures broadening, the RBA has judged that additional restraint is necessary.

Housing continues to present a difficult policy trade-off. Rising rents and new dwelling costs are being driven largely by structural problems. Higher interest rates will not calm rental growth and may further discourage new housing construction.

Despite this, the RBA has prioritised broader inflation control. By acting early to contain rising inflation expectations, the Bank aims to reduce the risk that temporary energy price shocks translate into sustained inflation across the economy.

Australia’s housing market has remained resilient despite higher interest rates. Prices rose strongly in 2025, supported by population growth and constrained supply. Higher borrowing costs will limit borrowing capacity and slow price growth in 2026, but the underlying shortage of homes means upward pressure on prices and rents is likely to continue.

The decision signals a central bank that remains determined to return inflation to target, even as global instability makes the policy outlook increasingly complex.