The Reserve Bank of Australia has lifted interest rates by another 0.25 percentage points, taking the official cash rate to 4.35 per cent as the central bank moves to contain a fresh inflation spike driven by soaring fuel prices.

The decision, announced on Tuesday, raises the cash rate target from 4.10 per cent to 4.35 per cent and brings borrowing costs back to the same level they were at in February 2025, before the RBA began last year’s rate-cutting cycle. The latest move means last year’s monetary easing has now been fully unwound.

The rate rise comes just one week before the Albanese Government is due to hand down the federal budget on May 12, adding fresh pressure on households already dealing with higher mortgage repayments, rising petrol prices and cost-of-living stress.

The RBA said the Board decided to increase the cash rate target by 25 basis points to help bring inflation back under control, with the central bank warning that inflation is likely to remain above its 2 to 3 per cent target range for some time.

The decision was made by majority, with eight members voting to lift the cash rate and one member voting to leave it unchanged at 4.10 per cent.

It is the third rate rise this year, following increases in February, March and now May, as the RBA responds to renewed inflation pressures in the Australian economy.

The immediate trigger for the latest move was last week’s inflation data, which showed headline inflation accelerating sharply to 4.6 per cent in March, up from 3.7 per cent in February. The Australian Bureau of Statistics said automotive fuel prices jumped 32.8 per cent in March, the strongest monthly rise since the monthly CPI series began in 2017, with petrol and diesel prices hit by conflict in the Middle East.

The RBA said higher fuel prices were already feeding into inflation and were likely to have second-round effects across other goods and services. It also noted that inflation had already been too high before the Middle East conflict pushed global energy prices higher.

In its latest Statement on Monetary Policy, the RBA said headline inflation is now expected to peak at 4.8 per cent in mid-2026, while trimmed mean inflation, the central bank’s preferred measure of underlying price pressure, is forecast to peak at 3.8 per cent.

The central bank is also forecasting a weaker economy. It expects annual GDP growth to slow from 2.6 per cent in December 2025 to 1.3 per cent by the end of 2026, while unemployment is forecast to rise gradually from 4.3 per cent to 4.7 per cent by mid-2028.

That puts the RBA in a difficult position. Higher interest rates may help contain inflation, but they will also increase pressure on mortgage holders and slow household spending at a time when consumer and business confidence has already weakened.

The RBA acknowledged that the outlook is more uncertain than usual, largely because the duration and severity of the Middle East conflict remain unclear. The central bank has modelled scenarios in which a prolonged conflict keeps energy prices elevated, pushing inflation higher and weakening household spending and business investment.

The RBA said the Board would continue to monitor incoming data and risks to the economy, but added that after three rate rises this year, monetary policy was now “well placed” to respond to future developments.

For households, the rate rise means another hit to mortgage repayments. Banks are expected to pass on the increase to variable-rate borrowers, while savers may see higher returns on deposits.

For the Albanese Government, the timing is politically difficult. The federal budget will now be delivered against the backdrop of higher rates, rising fuel costs, slower growth and a central bank warning that inflation is not yet under control.

The message from the RBA is clear: inflation has returned as the dominant economic threat. But the cost of fighting it will be felt most sharply by households already stretched by years of price rises, rent pressure and mortgage stress.

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