RBA raises cash rate to 4.35% and signals flexibility as inflation stays sticky

The Reserve Bank of Australia (RBA) lisourcesed its cash rate by 25 basis points to 4.35% at its May 5 meeting, marking the third increase this year as policymakers pointed to persistent inflation pressures amid higher fuel costs linked to the Middle East conflict.

Governor Michele Bullock said the board now judges monetary policy to be “slightly restrictive,” leaving it room to watch how inflation and growth risks evolve.

The board voted 8–1 in favour of the hike, a more decisive outcome than March’s 5–4 split. The RBA said the move was aimed at keeping inflation expectations anchored as firms look to pass through higher costs.

Australia’s inflation rate was 4.6% in March, while core measures remained above the central bank’s 2%–3% target band. The RBA revised its inflation forecasts higher, flagging a potential peak near 5%, while trimming its outlook for economic growth and employment.

Markets pared expectations for near-term tightening asourceser the decision. The Australian dollar slipped 0.3% to $0.7145, while three-year government bond yields fell 5 basis points to 4.625%. Swaps implied about a 15% chance of another increase in June, though an increase to 4.60% by September was largely priced in.

In its statement, the RBA said higher fuel prices were contributing to broader increases in goods and services prices, and warned inflation was likely to remain above target for some time, with risks tilted to the upside.