Australia central bank hikes rates to a near 1-year high as Iran war raises inflation risks

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Michele Bullock, governor of the Reserve Bank of Australia (RBA), speaks during a press conference in Sydney, Australia, on Tuesday, July 8, 2025.

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

The 25 basis points hike was in line with expectations from analysts polled by Reuters, and comes as Australia’s inflation stays above the central bank’s upper limit of 3%, with the war in the Middle East risking a further rise in prices.

“While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025,” the Reserve Bank of Australia said in its statement.

While developments in the Middle East remain highly uncertain, the RBA also said, they are likely to add to global and domestic inflation. The bank added that inflation was likely to remain above target for “some time” and that the risks have tilted further to the upside, warranting the rate hike.

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

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

Hauser highlighted that the RBA expects inflation will return to its 2%-3% target range by the end of 2026 or in 2027, and to the midpoint of that target range in 2028.

In February, the central bank had forecast headline inflation to peak at 4.2% around mid-2026, and then come down to “a little below 3%” by mid-2027.

These estimates, Hauser said, could be revised upwards, as they came before the oil shock owed to the Iran war.

Inflation in the country was at 3.6% for the quarter ended December. On monthly basis, inflation was at 3.8% in January, marginally surpassing 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 keep rates elevated.

Australia’s S&P/ASX200 index was up 0.11% following the decision.

Speaking to CNBC’s “Squawk Box Asia,” Paul Bloxham, chief economist for Australia, New Zealand and global commodities at HSBC, said domestic factors were the key reason behind the move.

“It’s primarily that the Australian economy is growing faster than its speed limit. The output gap is positive, inflation is too high where it is right now, and the unemployment rate is still quite low,” he said.

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