Reserve Bank of Australia (RBA) Governor Michelle Bullock speaks at a press conference in Sydney, Australia, Tuesday, July 8, 2025.
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Australia’s central bank on Tuesday raised its benchmark policy rate for the second time in a row to 4.1%, its highest level since April 2025, as inflation continues.
The 25 basis point hike was in line with analyst expectations polled by Reuters and comes as Australia’s inflation rate remains above the central bank’s 3% limit and there is a risk of further price increases amid Middle East wars.
“Inflation has fallen significantly from its peak in 2022, but rose significantly in the second half of 2025,” the Reserve Bank of Australia said in a statement.
While developments in the Middle East remain highly uncertain, global and domestic inflation is likely to rise further, the Reserve Bank of Australia said. The central bank added that inflation is likely to remain above target “for some time” and risks are tilted further to the upside, justifying a rate hike.
Paul Bloxham, HSBC’s chief economist for Australia, New Zealand and global commodities, told CNBC’s Squawk Box Asia that the main reason for the move was domestic factors.
Mr Bloxham said Australia had one of the tightest labor markets in the world and inflation remained above target. “The output gap is positive and inflation is currently too high. Unemployment remains fairly low.”
He said the RBA had determined it could not afford to wait and watch global developments as the Iran war continued to accelerate inflation in Australia.
However, the decision to raise interest rates was passed with a narrow margin of 5 votes in favor and 4 votes against.
The RBA’s views echo concerns raised by Deputy Governor Andrew Hauser, who said in an interview last week: “We have a problem with inflation. Inflation is too high.”
Hauser highlighted that the RBA expects inflation to return to its 2% to 3% target range by the end of 2026 or 2027, and to the midpoint of that range in 2028.
The central bank predicted in February that headline inflation would peak at 4.2% around mid-2026, before falling to “just below 3%” by mid-2027.
Hauser said these estimates predate the oil shock caused by the Iran war, so they could be revised upward.
The country’s inflation rate was 3.6% in the quarter to December. On a monthly basis, the inflation rate in January was 3.8%, slightly higher than the expected 3.7%.
The country’s economic growth remains strong, with GDP in the fourth quarter beating expectations at 2.6%, giving the central bank room to raise interest rates.
australian S&P/ASX200 Following this decision, the index rose by 0.11%.
