RBA interest rates: Reserve Bank raises rates to 4.1 per cent for first time since May 2025

Australian borrowers have been hit with another 25-basis point interest rate hike from the Reserve Bank, which signalled it is determined to stamp out inflation even at the cost of recession.

In an unusual split decision, five members of governor Michele Bullock’s nine-person monetary policy board voted to increase the cash rate by a quarter of a percentage point to 4.1 per cent while four members opted to leave the cash rate target unchanged at 3.85 per cent.

Ms Bullock clarified in her media conference the difference was about the timing rather than the direction of interest rates and suggested another RBA rate increase was likely.

“Where the difference was, was in the timing,” she told reporters in Sydney.

“The members that voted to hold were voting to hold in a hawkish sense.

“They were still focused on the fact that there’d probably need to be another rate rise.

“With all the things going on in the Middle East, it wasn’t quite certain what was going to happen there.”

Australia’s most powerful central banker also suggested aggressive monetary policy tightening could bring about a recession, something that hasn’t occurred in Australia in that way since 1991, after the RBA target cash rate had hit 17.5 per cent a year earlier.

“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,” she said.

With motorists now paying $2.40 a litre on average for unleaded petrol, the RBA acknowledged the Iran war had worsened Australia’s inflation challenge.

“The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation,” it 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.”

But there was also an acknowledgement that higher fuel prices could strain economic activity during a time of weak productivity.

“Higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia,” the RBA said.

Treasurer Jim Chalmers seized on the split vote as he distanced himself from the rate rise.

“It was a close vote and it was a close call - I think that reflects the uncertainty that we’re seeing in the global economy and the statement refers to risk in both directions,” he said in Canberra.

“This is obviously not the decision that lots of Australians were hoping for.

“It’s not a surprising decision but that doesn’t make it any easier for millions of Australians.”

The second increase since February has taken the cash rate back to 4.1 per cent for the first time since May last year, and reversed two of the RBA’s three rate cuts in 2025.

“Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation,” the RBA said.

“In light of these considerations, the board judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations. It was therefore appropriate to increase the cash rate target.”

The latest increase adds $120 to monthly repayments on an average, new mortgage of $736,000.

But in his media conference, Dr Chalmers noted the average outstanding mortgage was $460,000.

“This decision means an extra $73 a month but I accept that a lot of people have bigger mortgages than that,” he said.

“For every $500,000 that people owe, it means about $79 a month.”

Inflation was already high at 3.8 per cent in January before the US strikes on Iran at the end of February pushed up crude oil prices.

“In reality, the meeting was already live well before the conflict began and reflects concerns about the dire state of the supply side of the Australian economy – unable to grow at or above two percent without breaking out in inflation sweats,” Deloitte Access Economics chief Pradeep Philip said.

National Australia Bank is warning of a 5 per cent inflation rate for the first time since 2023 when the RBA was last hiking rates at successive meetings.

ANZ, like the other big four banks, is also warning of a follow-up increase in May, that would take the RBA cash rate back to 4.35 per cent for the first time since February last year, before the first of three cuts.

“That level of interest rates, combined with the negative impact on household finances and demand from the energy price shock, should mark the end of this tightening cycle,” the bank’s head of Australian economics Adam Boyton said.

With average capital city unleaded prices now above $2.40, following a 60 per cent surge in wholesale prices in less than three weeks, more expensive fuel is expected to worsen price pressures in the economy, and push inflation even further above its 2-3 per cent target.

Australia’s big four banks and the futures market were bracing for Tuesday’s RBA hike, with crude oil price climbing back above $US100 a barrel early this week for the first time since Russia’s Ukraine invasion in 2022.

Before US strikes killed Iran’s Ayatollah Ali Khamenei 16 days ago, financial markets had been expecting the RBA to move in May following the release of March quarter inflation data.

But the abrupt spike in crude oil prices and fears of a global crude oil shortage prompted Ms Bullock in early March to suggest rates could increase at the March 17 meeting.