RBA Raises Cash Rate to 4.35%; Mortgage Stress and Inflation Remain Key Concerns

Australia's cash rate rises to 4.35% as RBA battles persistent inflation.

The Reserve Bank of Australia (RBA) has raised the official cash rate to 4.35% as of May 5, 2026, marking the third consecutive increase of 0.25 percentage points. The decision was driven by persistently high inflation, which reached 4.09% in the first quarter of 2026 and 4.6% in March. The move has intensified financial pressure on mortgage holders, with data indicating a surge in calls to the National Debt Helpline and a significant portion of borrowers at risk of mortgage stress.

RBA Policy and Economic Outlook

• The RBA raised the cash rate to 4.35% on May 5, 2026, following increases in March and April.
• Eight board members voted for the increase; one voted to hold rates at 4.1%.
• The RBA stated that inflation has "picked up materially" in the second half of 2025, partly due to conflict in the Middle East raising fuel and commodity prices.
• The central bank indicated that inflation is likely to remain above its 2% to 3% target for an extended period.

• The RBA's economic forecasts project a policy rate of 4.7% by December 2026, 50 basis points higher than earlier projections.
• Inflation forecasts were revised to 4.8% for the June quarter and 4% for the year ending 2026, up from previous estimates of 4.2% and 3.6%, respectively.
• Economic growth for 2026 was revised down to 1.3% from 1.8%.

• ANZ Bank described the RBA's tone as "more hawkish than expected" and noted no clear opening for a pause in June.
• Capital Economics' Senior APAC Economist Abhijit Surya predicted the RBA will hike rates to 4.60% in the third quarter of 2025, citing potential upside surprises in inflation data.

Inflation Data

• Australia's inflation rate reached 4.09% in the first quarter from a year earlier, the highest in more than two years.
• Monthly inflation hit 4.6% in March, the highest since the monthly CPI series began in 2025.
• The trimmed mean (core inflation) was at 3.3%, above the RBA's 2.5% target.
• The 12-month inflation rate slowed to 4.2% in April 2026, down from 4.6% in March.
• The decline in April was largely driven by a nearly 12% drop in fuel prices, but underlying price pressures increased, with the trimmed mean rising to 3.4%.

• Housing costs: Rose 5.2% (annual) in November, and 5.5% (annual) in December, including rents (+4%) and new home construction (+2.8% in November).
• Food and drink: Inflation accelerated to 3.3% in the year to May, including a 4% increase in restaurant and takeout meals.
• Transport costs: Rose 6.6% over the year.
• Electricity prices: Rose 21.5% annually in December, partly attributed to the exhaustion of state government rebates.

"The RBA stated that inflation has 'picked up materially' in the second half of 2025."

Impact on Mortgage Borrowers

• With the cash rate at 4.35%, Roy Morgan data indicates 30.4% of mortgage borrowers (1.64 million people) are at risk of mortgage stress.
• If the RBA raises rates to 4.6% in June, the at-risk share is forecast to rise to 30.9% (1.67 million people).
• For borrowers with a $1 million mortgage, cumulative rate increases since January 2026 have added $600 per month to repayments.
• A single 0.25 percentage point rate rise adds about $157 per month to repayments on a $1 million loan.

• The National Debt Helpline received over 65,000 calls since the start of 2026, with mortgage stress as the primary reason.
• Calls in April 2026 totaled 13,933, a 21% increase from 11,554 in April 2025.
• Online chat conversations rose from 1,412 to 2,053 over the same period.
• 41% of callers were employed (28% full-time, 14% part-time).
• 34% had dependents, and 27% were aged 35-44.

Labor Market

• The seasonally adjusted unemployment rate fell to 4.4% in a recent reading, while the smoothed trend unemployment rate rose to 4.4%, the highest since November 2021.
• The participation rate reached a historic high of 67%.
• The share of individuals working multiple jobs increased by 0.4 percentage points, equivalent to over 100,000 additional workers, according to an IMF working paper.
• The labor supply response to rate hikes was concentrated among mortgage holders, not renters.

• ABS quarterly job vacancies data for May showed a 2.1% decline in open positions compared to the previous quarter.
• This is the first quarterly fall since August last year.
• The 329,500 job vacancies advertised over the quarter is more than 30% below the peak four years ago.
• Financial and insurance services recorded the largest quarterly percentage drop (-21.4%), while manufacturing vacancies rose by 16.9%.

Consumer Sentiment and Spending

• The Westpac consumer sentiment index fell by 2.9% to 80.6 in June, remaining near the weakest levels in its 50-year history.
• The "time to buy a dwelling" index rose 12.6% to 81.1, still very weak.
• House price expectations index fell 14.9% to 128.2, the first drop below the long-run average in nearly three years.
• Consumer spending on durable goods saw an uptick after individuals received tax refunds or lower mortgage rates, with the RBA citing this rise in demand as a factor in its decision to raise rates.

Housing Market

• National home prices increased by 0.8% in January, bringing the national median value to $912,465.
• Sydney maintained its position as the most expensive city, with a median home price of $1,290,537.
• NAB forecasts Sydney house prices to fall 6% and Melbourne prices 7% in 2026.
• The value of Australia's 11.5 million dwellings rose by $316 billion in Q1 to $12.8 trillion. The average dwelling price rose $22,300 to $1.1 million.
• Housing affordability has reached its lowest point in traceable history, according to the PropTrack Housing Affordability Index.

Government and Institutional Responses

• The Fair Work Commission announced a 4.75% increase to minimum and award wages, effective July 2026.
• The lowest-paid workers (around 100,000) will receive a 6% increase.
• The national minimum wage will rise to $1,004.90 per week ($26.44 per hour).
• The FWC called the decision "particularly challenging" due to economic uncertainty related to the Middle East conflict and higher-than-forecast inflation.
• The increase is projected to have the largest impact on women, part-time, and casual workers.

• Financial counsellors advise borrowers facing difficulty to contact their lenders early and request hardship relief, such as temporary repayment pauses or reductions.
• Borrowers are advised to seek their lender's best retention rate by indicating they may switch to a rival institution.
• Major banks report that the majority of mortgage customers are ahead on repayments, with low hardship rates.

Energy and Essential Costs

• The Energy Bill Relief Fund subsidy, which provided a $75 quarterly reduction, ended on December 31, 2025.
• A 26-cent-per-liter cut to the fuel excise tax was effective from April 1 to June 30, potentially saving about $20 per 65-liter tank of petrol.
• Private health insurance premiums increased by an average of 4.41% effective April 1, 2026.
• Some councils are seeking special rate increases; North Sydney Council is preparing a revised proposal to raise ordinary rates by 52 percent over three years.

Future Outlook and Forecasts

• NAB senior economists state the RBA is likely to begin cutting interest rates in early 2027, with the cash rate reaching 3.6% by year's end.
• Westpac expects the RBA to raise the cash rate by 0.25% in August and September 2026, with cuts not occurring until 2028.
• ANZ updated its forecast to include two 0.25% cuts in 2027, bringing the cash rate to 3.85%.
• A survey of 38 economists found seven, including those from Commonwealth Bank and NAB, expect the RBA to raise rates during its first policy meeting of the new year.

• RBA chief economist Sarah Hunter warned that persistent inflation expectations could make it harder to return inflation to target.
• The RBA's liaison program indicates that fuel surcharges are being raised by firms at the start of supply chains, with some planning to increase retail prices.
• Construction firms in high-demand regions are reviewing prices for new contracts.
• The RBA board minutes noted rising bond yields and the impact of elevated oil prices on inflation.