RBA's May 2026 cash rate decision revealed

On Tuesday (5 May), the RBA board raised the official cash rate by 25 basis points to 4.35 per cent in an 8-1 decision.

Economists widely expected this outcome after annual headline CPI rose to 4.6 per cent in March, and trimmed mean inflation remained above the RBA’s 2-3 per cent target range at 3.3 per cent.

In its monetary policy decision statement, the RBA board said:

"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."

The central bank said it anticipated inflation was likely to remain above target for some time, and risks were tilted to the upside.

BDO chief economist Anders Magnusson said the RBA had "little choice but to act," faced with price pressures building both domestically and internationally.

"The broader economic effects of the energy shock are still ahead of us. Higher fuel and transport costs are expected to feed through to broader prices over coming months. The risk extends beyond petrol, to second-round effects including higher food prices via fertiliser costs and renewed pressure on air travel as fuel costs reshape capacity and pricing," he said.

"The RBA cannot reopen the Strait of Hormuz or bring down global oil prices. What it can do is limit the risk that higher input costs become broad and persistent inflation by reducing demand across the economy. Maintaining credibility of the inflation target is also critical to keeping expectations anchored. That is why today’s increase was the right decision. It is pre-emptive, but it is also necessary, because the pain of acting now is much less than the pain of losing control of inflation later. "

RSM Devika Shivadekar said the RBA's decision had been widely expected, given that Australia's economy had already been running hot before the fuel shock hit.

"The central bank now expects headline inflation to peak at 4.8 per cent in mid-2026, with underlying inflation remaining above 3 per cent until mid-2027, and only returning to the 2.5 per cent midpoint of the target band by mid-2028 - roughly two years later than previously hoped," she noted.

"To achieve that path, the RBA's forecasts assume the cash rate rises further to 4.7 per cent by the end of 2026."

Previously, the RBA raised the cash rate over two consecutive meetings, bringing the cash rate from 3.60 to 4.10 since the beginning of 2026.

Last Wednesday (29 April), headline CPI climbed to its highest level since late 2023, prompting economists to largely anticipate a rate hike today. As of last Friday (1 May), markets had predicted a 26 per cent chance of a hold, and a 74 per cent chance of a hike.

Belinda Allen, head of Australian Economics at Commonwealth Bank, said the bank expected the RBA to hold interest rates after today’s meeting.

“Beyond May, we expect the RBA to remain on hold as activity slows under the weight of three rate hikes and higher energy prices,” she said.

Westpac’s chief economist, Luci Ellis, anticipated that the RBA would hike rates two additional times after May.

“We retain our base case of another two hikes beyond May, in June and August, taking the cash rate to a peak of 4.85 per cent,” she said.

Article updated to include additional commentary.