Borrowers hit with their third interest rate rise for 2026

Borrowers have been hit with their third interest rate rise this year, with the official cash rate increasing on Tuesday (5 May) by 25 basis points to 4.35 per cent.

The conflict in the Middle East has caused an inflation surge that the Reserve Bank of Australia (RBA) felt it could not ignore without putting the economy in peril.

“As expected, developments in the Middle East are having an impact on inflation,” the RBA Board’s Monetary Policy Decision noted.

“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.

“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.”

All four of the country’s largest banks promptly announced 0.25 per cent mortgage repayment increases.

The upshot for the average Aussie homeowner is that they may be spending $344 more on monthly repayments than they were at the start of the year.

Compare the Market said borrowers with an average loan of $736,000 paid around $114 more a month for each 0.25 per cent rate hike confirmed since February.

Those three rate hikes could add $4,128 to repayments over a year.

The company’s Economic Director, David Koch, said that amount could represent around four months’ worth of groceries, almost a year and a half of petrol, or two return tickets to London.

“Quite simply, these hikes will have a huge impact on household budgets,” Mr Koch said.

“If the first two didn’t, this third one will really scare people.

“For people who were already living up against their limits, and for recent homebuyers unfamiliar with higher rates, I think this is really going to hurt.

“All of the rate cuts homeowners enjoyed last year have officially been reversed.”

Ray White Chief Economist Nerida Conisbee said housing continues to sit at the centre of Australia’s inflation problem.

“In some ways, higher fuel prices are already doing part of the RBA’s work; they are reducing household spending power at a time when consumer confidence is already extremely weak.

“The challenge is that Australia’s inflation problem is still heavily tied to housing.

“The housing group rose 6.5 per cent over the year, with electricity, new dwellings and rents the key drivers.

“New dwelling prices rose 4.5 per cent, reflecting builders passing through higher labour and materials costs.

“Construction costs are no longer rising at the extraordinary pace seen during the pandemic, but they continue to weigh on inflation and make it harder to deliver new housing at scale.”

Recession risk

In its statement, the RBA said inflation is likely to rise further on the back of “second-round” impact on goods and services, in addition to Australia’s existing home-grown inflation woes. This led to an eight-to-one majority decision by the Board in favour of lifting the cash rate.

Canstar.com.au analysis shows today’s increase will add around $91 to the monthly repayments of a $600,000 mortgage with 25 years remaining. Across all three hikes, it totals an extra $272 a month.

If the cash rate remains steady for the next 12 months, that’s an extra $3,265 over the next year in mortgage repayments, compared to if there had been no hikes in 2026.

RBA Governor Michele Bullock said there is a worsening trade-off between inflation and growth.

“I understand the pain facing households but we need to act now to stop inflation getting away from us.”

When asked at a press conference that followed the rate hike announcement if the RBA’s latest move would increase the risk of a recession, Ms Bullock pointed out that the central bank is now forecasting Australia’s economic growth to slow to 1.3 per cent annually by December, which she describes as “anaemic” and “not a great outcome”.

“Yes, we are all feeling poorer, that’s what this war has done, on the other side of the world,” she said.

She added that there is a risk the RBA has placed too much weight on the inflationary risk and not enough on the growth risk, but said that based on the prevailing data, she doesn’t think that’s the case.

The RBA expects inflation to get worse before it gets better, with headline inflation peaking at 4.8 per cent mid-year and not easing back below 3 per cent until next June.

The prospect of an imminent end to the war in the Gulf that is fuelling inflation appears forlorn.

Reports emerging from the region on Tuesday indicate the conflict is worsening, with the US claiming seven Iranian fast boats had been sunk, while Iran has reportedly fired missiles and drones at military and commercial ships while insisting it still controls traffic in the Strait of Hormuz.

Ship tracking tool MarineTraffic shows little shipping traffic passing through the Strait of Hormuz on Tuesday.