Reserve Bank raises official cash rate for third time this year

The bank's governor, Michele Bullock, announced the 25 point increase on Tuesday, May 5, bringing the cash rate to 4.35 per cent.

The widely expected hike follows successive rises in both February and March, which came after two years of rate holds or decreases.

In a media release, the Reserve Bank said the board considered the likelihood of inflation remaining above target for some time.

"As expected, developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly," the statement said.

"This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.

"In light of these considerations, the 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. It was therefore judged appropriate to increase the cash rate target."

The widely-predicted increase comes after the Australian Bureau of Statistics revealed last week that the Consumer Price Index - or the change in the cost of a "basket" of consumer goods - had risen 4.6 per cent in the 12 months to March 2026.

When inflation - or the rising cost of goods and services - goes above the target range of 2 to 3 per cent, the Reserve Bank can attempt to curb it by reducing spending in the economy.

It does this by raising the interest rate, which raises mortgages, among other things. This in turn forces households to make cuts in other areas.

According to Finder's Reserve Bank of Australia survey, three quarters of experts predicted the rate would go up again.

The Reserve Bank prefers to use trimmed mean inflation, also called underlying inflation to determine the inflation trend.

Trimmed mean inflation excludes the goods and services which saw the top and bottom 15 per cent price changes, which would exclude the rising cost of fuel.

However, the increasing unaffordability of petrol has leaked into other areas of the economy, including the price of supplies for cafes, and the cost of construction.

Australian home owners can expect to pay more on their monthly repayments thanks to the new cash rate.

Canstar data suggests a borrower owing $500,000 on their home could be paying $76 extra each month from May, and $227 since the first rate hike in February.

At the other end of the scale, those owing $1 million on their homes can expect up to $152 extra on their monthly bill, a $453 increase from February.

Canstar data insights director Sally Tindall encouraged home owners struggling to afford their mortgage payments to "haggle" with the bank for a better deal, or consider refinancing with another institution.

Property prices are expected to soften somewhat following the rate rise as people's borrowing capacity is reduced.

LJ Hooker head of research Mathew Tiller said he expected property to continue transacting throughout winter, but at a slower pace than previously.

"Buyers are still out there and while it may not be a massive number that will push up prices higher, we see them turning up at auctions and inspecting open homes," Mr Tiller said.

"There will be more listings on the market and less competition between buyers.

"But the positive is that will give those looking to purchase more choice and more time to decide after a period of such tight stock levels."