Rapid Response - RBA raises the cash rate back to post-pandemic peak and hints that peak is near

Today, the RBA raised the cash rate by a quarter point, returning it to the post-pandemic peak of 4.35% on an 8-1 vote. However, there was also a hint that the MPB may be anticipating that rates are near their peak, as reflected in market pricing, since monetary policy is now judged to be slightly restrictive.

• The Monetary Policy Board's official statement included the following comments:

  • "Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen.

  • "The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February. It then declines as demand growth slows and capacity pressures ease in response to higher interest rates.

  • "Financial conditions have tightened this year [...] But credit is readily available to both households and businesses.

  • "There are materially heightened uncertainties about the outlook for domestic economic activity and inflation. With the conflict in the Middle East continuing, there are plausible scenarios where inflation is higher and activity lower than envisaged under the baseline forecast. A longer or more severe conflict could put further upward pressure on global energy prices; this would push up near-term inflation and could also increase inflation further out as these costs are passed through and if price rises get built into longer term inflation expectations. But higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia.

  • "As expected, developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy."

    
    

• The February SMP forecasts were produced before the start of the conflict in the Middle East. Based on market cash rates, the new May estimates assume inflation will rise more than anticipated, peaking at around 4.8% before declining over the forecast horizon. This is +0.6% higher than the February estimate of 4.2%.

• Real GDP growth has moved to a lower sub-trend trajectory, with the second half of 2026 expected to see economic growth -0.5% lower, while unemployment is expected to continue rising to 4.7% by mid-2028. Lower household spending is cited as a contributing factor, while private investment has exceeded expectations.

• Earlier today, the ABS revealed that Household Spending rose by +1.6% in March, slightly short of expectations, and +6.3% yoy, which was higher than anticipated after prior-month revisions. However, the increase was driven by a +5.1% rise in transport costs due to higher fuel prices. Volumes of sales were up +0.7% over the entire first quarter and up +2.8% yoy, which nevertheless marked the strongest annual growth recorded since June 2023.

• S&P/ASX200 8,676 -0.24%, AUDUSD 0.7148 -0.27%, Aus 2yr 4.66%-2bps, Aus 10yr 4.96% -1bps

  
  

Fin-X View

• Today's statement was shorter than usual and stripped away much of the detail related to the domestic economy. But there was also more certainty surrounding the inflationary effects of the rise in fuel prices.

• While March saw a split 5-4 decision to raise rates to 4.10%, today's decision passed 8-1 to lift rates to 4.35%. Although the differences in March were largely related to the timing of an increase, this suggests that most of the dissenting members in March have been convinced by subsequent data that further tightening was necessary.

• At the same time, there is some suggestion that the tightening might be nearing its peak. The governor confirmed at the press conference that monetary policy is now perceived to be slightly restrictive, firstly to respond to the previously seen excess demand and secondly to prevent a rise in inflation expectations following the commodity price shock.

• Before the meeting the market anticipated one more rate rise to 4.60% later this year. Some anticipated fiscal tightening in next week's Budget may have had an influence, although The Australian reported today that the government might be considering household stimulus, potentially putting more upward pressure on demand. If it materialises, that would represent an upside risk to inflation and the cash rate.

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