RBA delivers third consecutive rate hike

Leading up to Tuesday’s interest rate decision from the Reserve Bank of Australia (RBA), the futures market had forecast roughly a 60% probability of a 0.25% rate hike.

This pricing suggested that the decision was ‘line ball’ – similar to the 5-4 vote at last month’s meeting in favour of hiking.

Irrespective of whether the RBA hiked on Tuesday, financial markets were still pricing at least two and a better than 50% chance of a third rate hike by the end of 2026.

If the financial market’s view came to fruition, Australia’s official cash rate would end 2026 at either a 15-year high of 4.6% or an 18-year high of 4.85%.

Alas, Tuesday’s RBA meeting has increased the official cash rate by 0.25% to 4.35%, returning it to the 2024-25 peak:

Eight board members voted to hike and only one voted against hiking.

In arriving at its decision, the RBA cited that “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 RBA also cited risks associated with a longer and more severe conflict in the Middle East.

“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”.

As a result, the RBA board “assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations”.

The RBA board concluded that it will remain data dependent and “will do what it considers necessary” to return inflation to its target band of 2% to 3%.

Therefore, expect more rate hikes in the period ahead.