Australia’s central bank raised rates by 25 basis points to a nearly 1-year high

Australia’s central bank raised benchmark policy rates for a second time on Tuesday, pushing them to their highest level since April 2025 to 4.1%.

The 25 basis point increase was in line with the expectations of analysts polled by Reuters and as Australian inflation remains above the central bank’s upper limit of 3%, war in the Middle East threatens to push up prices further.

“Inflation has declined substantially from its peak in 2022, but it will pick up materially in the second half of 2025,” the Reserve Bank of Australia said in its statement.

While developments in the Middle East are more uncertain, they are likely to boost global and domestic inflation, the RBA said. The bank said inflation is likely to remain above target for some time and risks tilting further to the upside, justifying a rate hike.

The decision on the increase was passed by a narrow majority, with five votes in favor of the increase and four against.

The sentiment from the RBA echoes the concerns of Deputy Governor Andrew Houser, who said in an interview last week that “we have an inflation problem. It’s too high.”

Hauser said the RBA’s projection is that inflation will only return to its 2%-3% target range in late 2026 or 2027 and the midpoint of that target range in 2028.

In February, the central bank forecast inflation to peak at 4.2% in mid-2026 and then fall to “slightly below 3%” in mid-2027.

These estimates, Hauser said, could be revised upward because they came before the oil shock to the Iran war.

Inflation in the country stood at 3.6% in the quarter ended December. On a monthly basis, inflation stood at 3.8% in January, slightly beating expectations of 3.7%.

Economic growth in the country remains strong, with fourth-quarter GDP exceeding expectations at 2.6%, allowing the central bank room to raise rates.

of Australia S&P/ASX200 The index rose 0.11% after the decision.