RBA Lifts Cash Rate Again as Middle East War Fuels Inflation, Squeezing Mortgage Holders

Within three minutes of the Reserve Bank's announcement, Australia's fifth-largest mortgage lender had told customers it would pass the increase on in full. That is likely a new bank record, and it captured the mood of the day: the RBA lifted the cash rate by 0.25 percentage points to 4.35 per cent, the third hike of 2026, and borrowers who thought they had a cushion found it largely gone.

Governor Michele Bullock did not dodge what the decision means for households. She said she understood it was a really difficult time for people already facing higher fuel prices and other cost-of-living pressures. But she argued the board had to get on top of inflation now so it does not get away from the bank. Firms facing cost pressures, she said, are already looking to raise the prices of their goods and services. If higher costs get embedded in price and wage-setting decisions, these second-round effects could lead to even higher and more persistent inflation, and would require even more tightening.

The bank's statement put the cause squarely on the war in the Middle East, which it said has produced sharply higher fuel and related commodity prices that are already adding to inflation. Inflation had begun picking up in the final months of 2025, and the board noted early signs that many firms are looking to lift prices, while short-term measures of inflation expectations have also risen. Its baseline forecast assumes the conflict is resolved soon and fuel prices fall. On that basis underlying inflation peaks higher than expected in February, then declines as demand growth slows and capacity pressures ease in response to higher rates.

The RBA acknowledged "materially heightened uncertainties" around that outlook. A longer or more severe conflict could push global energy prices higher, lifting near-term inflation and potentially longer-term inflation if price rises get built into expectations. It also warned that higher prices and prolonged uncertainty could weaken growth in Australia's major trading partners and in Australia itself. With no peace deal on the table and Donald Trump raising the rhetoric again overnight, the source reports, signs of peace look far away.

For borrowers, the arithmetic is stark. The hike effectively finishes unwinding last year's three rate cuts. Many households kept their repayments unchanged after those cuts, building a buffer, and Canstar's data insights director Sally Tindall says that buffer is essentially erased by a third hike in 2026. The strategy, she said, was not in vain, but delivered only a limited cushion. The average owner-occupier variable rate would rise to 6.26 per cent, above 6.25 per cent for the first time since January 2025. The lowest variable rate currently on offer, per Canstar, is below 5.75 per cent.

Canstar's advice starts with running the numbers, including a scenario with two further hikes in June and August, as Westpac is forecasting. That forecast is an outlier, the guide notes, but worth preparing for. Next, ring your lender and ask for a rate review: a 0.25 reduction offsets one hike, and 0.50 off neutralises two. Tindall cautions that banks are not handing out discounts as freely as a couple of years ago, and if yours will not budge, she suggests taking your business elsewhere. Smaller lenders tend to have the sharpest rates; she expects about 40 lenders to still offer at least one variable rate beginning below 6 per cent, even though most owner-occupier rates will start with a 6. Anyone whose budget no longer works should act before missing a repayment, ask about hardship assistance, and can seek independent advice from the National Debt Helpline on 1800 007 007.

There was one small note of relief for savers. The lender that moved in three minutes, Macquarie, said it will raise both variable home loan rates and rates on everyday accounts, effective May 22. Ben Perham, its head of personal banking, said customers will get 2.75 per cent on all Transaction Account balances and 5 per cent on Savings Account balances up to $2 million. Big-four rivals are sometimes slower to lift savings rates.

What happens next depends largely on the war. If fuel prices ease, the RBA's baseline suggests inflation peaks and falls; if not, Bullock has already said more tightening could follow.