At its meeting this morning, Tuesday, May 5, the RBA’s Governing Council decided, for the third time since the beginning of the year, to raise interest rates by 25 basis points, as expected, to 4.35%. The vote was 8-1, bringing the rate to its highest level since December 2024, as inflation continues to rise due to the conflict in the Middle East and rising fuel and commodity prices.

In its statement announcing the rate hike, the RBA noted that inflation had risen significantly in the second half of 2025. The conflict in the Middle East contributed to a sharp increase in fuel and commodity prices, which are linked to inflation. The bank updated its forecasts to include recent data and developments in the Middle East, concluding that inflation is likely to remain above target for some time.

In its quarterly outlook statement, the bank lowered its GDP growth forecast for the second half of this year to 1.3% from 1.8% in its previous estimate, and reduced it for the first and second halves of next year to 1.3% and 1.4%, respectively, compared to 1.6%.

Conversely, the bank raised its inflation forecast to 4.8% for the first half of this year ending in June, compared to 4.2% in its previous estimate, and to 4% for the second half from 3.6%. It lowered its forecast to 2.4% for the first and second halves of next year, compared to 2.9% and 2.7%, respectively.

There are uncertainties surrounding the outlook for domestic economic activity and inflation. With the ongoing conflict in the Middle East, there are possible scenarios in which inflation is higher and growth is lower than expected. The bank will pay close attention to data, its evolving risk assessment, global developments, domestic demand trends, inflation expectations, and the labor market, and will take whatever measures it deems necessary to achieve price stability and full employment.