RBA hikes rates, suggests more to come

The Reserve Bank of Australia (RBA) hiked interest rates by 0.25% at the May meeting, bringing the official cash rate to 4.35%.

This hike has now fully reversed the 75bps of cuts delivered last year and the cash rate is now in-line with its peak during the post-COVID-19 pandemic tightening phase.

HSBC chief economist Paul Bloxham said the move marks a difference from other global central banks.

"The fact that the RBA has been hiking makes it an outlier amongst of the major global central banks, with all of the major central banks - including the US Fed, ECB, Bank of Japan and Bank of England - all holding their policy rates steady at their meetings last week," Bloxham said.

"Largely, this reflects the starting point for the Australian economy where, prior to the Middle East conflict, the economy was operating beyond its full capacity, with a tight jobs market and underlying inflation that is well above its 2.5% target midpoint."

The RBA also updated its forecasts for the Australian economy, now seeing growth revised down to 1.3% for 2026 and 1.4% for 2027.

On core inflation, the forecasts see a peak in the trimmed mean of 3.8% in Q2 2026, up from 3.7%, before it falls towards the 2.5% target of the mid-point over the following two years.

"The RBA's central case assumes that the Middle East conflict is resolved soon and that oil prices peak soon around US$100 a barrel before falling to just under US$90 a barrel by end 2026," Bloxham said.

"In our central case, the RBA keeps it cash rate steady at 4.35% in coming quarters.

"A key risk to our view is that the Federal budget, which is due to be delivered on 12 May, is more expansionary than we have been assuming and that this could force the RBA to have to hike further."

Betashares chief economist David Bassanese said the rate hike was expected and suggested another rate hike may do more harm than good.

"Although central banks often aim to 'look through' the impact of short-run energy price shocks on the economy, the RBA is especially concerned that the latest shock is coming at an inopportune time of already tight labour and product markets. With both business and labour likely feeling they have good bargaining power, there's a higher than usual risk that the energy price shock becomes embedded into inflation through a round-robin series of wage and price increases," Bassanese said.

"Ominously, the RBA forecasts also assume the cash rate will 'move in line with market expectations', which currently incorporate one to two more rate hikes this year.

"By contrast, my view is that if the RBA did deliver two further rate hikes this year, we're likely facing a recession. Will that be needed? We can only hope not."

Bassanese said he is expecting the three hikes already delivered this year to be sufficient to "take some of the wind from the economy".

"At the least, the RBA seems likely to hold rates steady at the next policy meeting in June, allowing for some time to assess the economic impact of the rapid-fire rate hikes already delivered," he said.