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Currencies May 5, 2026 11:12 AM

RBA Boosts Cash Rate to 4.35%; Australian Dollar Largely Unmoved as Oil Rises

Third straight 25bp hike brings policy rate to a COVID-era peak while inflation outlook is revised higher and growth and employment forecasts are trimmed

By Jordan Park
RBA Boosts Cash Rate to 4.35%; Australian Dollar Largely Unmoved as Oil Rises

The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.35% at its May meeting, the third consecutive increase and a level that matches a peak reached during the COVID-19 inflation period. The board approved the move by an 8-1 margin, reversing a narrowly split vote from March. The Australian dollar traded around $0.7163, down 0.5% from the previous session amid rising oil prices. The central bank raised its inflation forecast for the year, projecting a peak near 5%, while lowering its outlook for economic growth and employment. Markets currently assign a 20% chance of a further rate increase in June and price in rates reaching 4.60% by September - a rate that would be the highest since late 2011. The RBA cited rising oil prices linked to the U.S.-Israeli war on Iran in explaining its inflation projections, which followed an escalation in tensions after Iran struck a UAE port and several ships in the Strait of Hormuz following a U.S. Navy attempt to help vessels exit the waterway.

Key Points

  • RBA raised the cash rate by 25 basis points to 4.35%, the third consecutive increase and matching a COVID-era peak.
  • The policy vote was 8-1 at the May meeting, a change from a split 5-4 vote in March, and the bank said "monetary policy is well placed to respond to developments."
  • Markets price a 20% probability of a further hike in June and expect rates to hit 4.60% by September; the Australian dollar traded at $0.7163, down 0.5% amid rising oil prices.

The Reserve Bank of Australia voted to lift its cash rate by 25 basis points to 4.35% at its May policy meeting, marking the third straight increase and bringing the key rate back to a peak level last seen during the COVID-19 inflation episode.

The policy decision carried an 8-1 majority among board members, a shift from March when the vote was split 5-4. In announcing the decision, the RBA said that having raised the cash rate three times, "monetary policy is well placed to respond to developments."

In currency markets the Australian dollar was largely unchanged on the day, quoted at $0.7163 and down 0.5% from the previous session amid rising oil prices. Technical levels noted by market participants include support at $0.7102 and resistance at $0.7228.

Market pricing assigns roughly a 20% probability to another rate increase in June. Forward pricing also points to expectations that the cash rate could reach 4.60% by September, a level that would be the highest since late 2011.

The RBA adjusted its economic projections alongside the policy move, raising its inflation forecasts for the year and projecting a peak near 5%. At the same time the central bank trimmed its outlook for economic growth and for employment.

In explaining its inflation outlook the RBA pointed to rising oil prices linked to the U.S.-Israeli war on Iran. The central bank's statement referenced geopolitical developments after tensions escalated when Iran struck a United Arab Emirates port and several ships in the Strait of Hormuz following a U.S. Navy attempt to help vessels exit the waterway.

Taken together, the policy decision and the accompanying revisions to forecasts underscore the RBA's balancing act between containing inflationary pressures and monitoring downside risks to growth and labour markets. Financial and commodity markets reacted to the policy and to the broader geopolitical backdrop, with oil prices a clear influence on both inflation projections and near-term currency moves.

Market context and immediate effects

  • The cash rate now stands at 4.35% after a unanimous movement by most board members, 8 to 1 in favour of the hike.
  • The Australian dollar traded at $0.7163, registering a 0.5% decline from the prior session as oil rose.
  • Market-implied probabilities point to a 20% chance of another increase in June and to bets that the rate could reach 4.60% by September.

Risks

  • Rising oil prices tied to the U.S.-Israeli war on Iran could push inflation higher, complicating the inflation-growth trade-off and affecting sectors sensitive to energy costs such as transportation and manufacturing.
  • Escalating geopolitical tensions after Iran struck a UAE port and several ships in the Strait of Hormuz could prolong commodity market volatility and weigh on investor sentiment, impacting financial markets and exporters/importers.
  • A weaker outlook for economic growth and employment, as signalled by the RBA, raises uncertainty for labour markets and demand-sensitive sectors while raising the prospect of altered monetary policy paths.

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