The RBA raised its cash rate 25bps to 4.35% in an 8-1 vote, citing Middle East inflation pressures, but Westpac sees the June move as more finely balanced after Governor Bullock’s dovish tone.

Summary:

• The RBA Monetary Policy Board raised the cash rate by 25 basis points to 4.35% at its May 2026 meeting in an 8-1 vote, up from a 5-4 split in March, according to Westpac’s analysis of the decision
• The board cited higher inflation stemming from the Middle East conflict, including second-round effects on goods and services prices, with risks skewed to the upside, per the Westpac note
• Westpac still expects further tightening this year but views a June hike as more finely balanced following Governor Bullock’s relatively dovish press conference remarks, according to the bank
• The RBA’s own forecasts show trimmed mean inflation peaking at 3.8% in Q2 and not returning to the 2.5% midpoint until June 2028, based on an oil price assumption of USD80/bbl by year-end, per the Westpac analysis
• Westpac’s own forecasts are more hawkish, projecting trimmed mean inflation peaking at 4% and remaining there through the rest of 2026, according to the note
• The revised RBA forecasts point to softer GDP, consumption and business investment, with labour market weakness expected to emerge with a lag, per Westpac

The Reserve Bank of Australia lifted its cash rate by 25 basis points to 4.35% at its May 2026 board meeting, a decision that drew near-unanimous support from the Monetary Policy Board in an 8-1 vote, a considerably stronger consensus than the 5-4 split that delivered the previous hike in March.

The board pointed to inflationary pressures amplified by the Middle East conflict, including the risk of second-round effects flowing through from higher fuel costs into the broader prices of goods and services. That dynamic compounded what the RBA already viewed as capacity-driven inflation pressures within the domestic economy, with risks assessed as tilted to the upside.

Despite the decisive vote, analysts at Westpac flagged a notable divergence between the hawkish implications of the RBA’s staff forecasts and the more measured tone struck by Governor Michele Bullock at her post-meeting press conference. Bullock framed the three rate rises delivered so far as addressing the inflation problem that pre-dated the Middle East conflict, and suggested this created room for the board to monitor how conditions evolved before acting again. Westpac interpreted that language as leaving a June pause more firmly on the table than the bank had previously expected.

The RBA’s own inflation projections show trimmed mean inflation peaking at 3.8% in the second quarter before gradually moderating, with the 2.5% midpoint of the target band not reached until June 2028. Those forecasts rest on an assumption that oil futures track back to USD80 per barrel by year-end, a level Westpac viewed as potentially optimistic given its own read of near-term price pressures.

Westpac’s analysts held to a more hawkish inflation outlook, projecting trimmed mean inflation peaking at 4% and remaining at that level through the remainder of 2026. The bank cited a higher oil price trajectory and a more prolonged pass-through from energy costs into areas such as home-building expenses as drivers of the divergence from the RBA’s central case.

On growth, the RBA revised down its forecasts for GDP and consumption, with business investment also expected to soften later in the year. Labour market conditions were seen easing with a lag, though Westpac highlighted what it described as fragility in both the near-term hours worked forecasts and the longer-run participation rate assumptions that underpin the RBA’s relatively sanguine view on wages and productivity.

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Next Reserve Bank of Australia meeting, June 15 and 16.