Michele Bullock, Governor of the Reserve Bank of Australia (RBA), speaks during a press conference in Sydney, Australia, Tuesday July 8, 2025.
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The Australian central bank raised its key rates on Tuesday for the second consecutive time, bringing them to their highest level since April 2025, at 4.1%, in a context of persistent inflation.
The 25 basis point rise is in line with the expectations of analysts polled by Reuters and comes as Australian inflation remains above the central bank’s upper limit of 3%, and as war in the Middle East threatens to cause prices to rise again.
“Although inflation has fallen significantly since its peak in 2022, it has recovered significantly in the second half of 2025,” the Reserve Bank of Australia said in its statement.
Although developments in the Middle East remain highly uncertain, the RBA also said, they risk contributing to global and domestic inflation. The bank added that inflation would likely remain above target for “some time” and that risks were still tilted to the upside, justifying the rate hike.
“The output gap is positive, inflation is too high where it is now and the unemployment rate is still quite low,” Bloxham stressed, noting that Australia has one of the tightest labor markets in the world and inflation has remained above target.
He said that as the war with Iran would continue to fuel inflation in Australia, the RBA decided it did not have “room to maneuver” to wait and see how global developments played out.
The decision concerning this increase was, however, adopted by a narrow majority, with five votes in favor and four against.
The RBA’s sentiment echoes concerns raised by Deputy Governor Andrew Hauser, who said in an interview last week, “we have a problem with inflation. It’s too high.”
Hauser highlighted that the RBA expects inflation to return to its target range of 2% to 3% by the end of 2026 or in 2027, and to the midpoint of this target range in 2028.
In February, the central bank had planned headline inflation is expected to peak at 4.2% around mid-2026, then decline to “a little below 3%” by mid-2027.
These estimates, according to Hauser, could be revised upwards, because they predate the oil shock caused by the war in Iran.
Inflation in the country was 3.6% for the quarter ended December. On a monthly basis, inflation stood at 3.8% in January, slightly exceeding expectations of 3.7%.
The country’s economic growth remains strong, with fourth-quarter GDP above expectations at 2.6%, allowing the central bank to maintain high rates.
Australia S&P/ASX200 the index rose 0.11% following the decision.
Speaking to CNBC’s ‘Squawk Box Asia’, Paul Bloxham, chief economist for Australia, New Zealand and global commodities at HSBC, said domestic factors were the main reason for the decision.
