A May 2026 rate hike has long been in the eyes of economists, even before the Reserve Bank of Australia (RBA) bumped the cash rate in February and March. Has the central bank’s response to international conflict and sticky inflation tipped the scales on forthcoming hike? And what does the future hold beyond?
One of the RBA’s main goals is to keep Australia’s inflation within its 2% to 3% target band. The most recent inflation figures from the Australian Bureau of Statistics (ABS) revealed headline inflation jumped 4.6% in the year to March, up from 3.7% in February, partly due to surging energy and fuel costs. Trimmed mean inflation, which removes much of the volatility, stabilised in March at 3.3%. Though, on a quarterly basis, it rose to 3.5% – the third consecutive quarterly rise. All these figures remain outside the RBA’s target.
Canstar calculations: Rate hike pain
Canstar calculates that for someone with a $600,000 mortgage and 25 years remaining at the start of the 2026 hikes, a 0.25 percentage point cash rate hike in May would increase a borrower’s monthly repayments by $91.
Adding that to the impact of 2026’s earlier hikes would see that borrower $272 worse off each month after May than they were before the central bank’s February hike.
Impact of three 0.25% rate hikes on monthly repayments | ||||
Debt owing | Feb | March | May | Total |
$600,000 | +$90 | +$91 | +$91 | +$272 |
$800,000 | +$120 | +$121 | +$122 | +$363 |
$1 million | +$150 | +$151 | +152 | +$453 |
Source: Canstar.com.au. Based on an owner-occupier paying principal & interest with 25 yrs remaining in Feb 2026 on the RBA av. variable rate. Calculations assume banks pass on the hikes the month after. Changes are to minimum repayments. | ||||
But a rate hike in May isn’t a done deal. Canstar's Data Insights Director, Sally Tindall, said that while hiking the cash rate could help halt inflation, the risk is pushing to the point of the economy buckling:
“Many households are already feeling the strain. Consumer confidence is sitting deep in the doldrums and Australians have already tightened their purse strings on the back of higher petrol prices and global uncertainty.
“A hike on Tuesday would effectively neutralise all three of the rate cuts we saw in 2025, taking the cash rate back to where it was at the start of last year.”
Ms Tindall urges homeowners to stress-test their finances against not only a May hike, but further hikes predicted for later this year:
“Do the maths on what a hike on Tuesday would mean for your budget. In fact, do the maths on a further three cash rate hikes, as per Westpac’s forecast, and make sure you can clear this amount. While this prediction is still an outlier, it’s better to be overcooked on the mortgage than underdone.”
RBA looks beyond petrol prices to avoid stagflation
The question contemplated by the RBA Monetary Policy Board in March wasn’t whether the cash rate needs to rise, but how soon. Board members weighed an immediate rate hike against another in the near future, with inflation, the labour market, and of course the ongoing Middle East conflict affecting their decision. Ultimately, the majority of the board voted to raise the cash rate to 4.10%.
Afterwards, RBA governor, Michele Bullock, told media that higher petrol prices didn’t drive the rate hike decision:
“Inflation was already too high, reflecting the fact that demand is outstripping supply. Higher fuel costs will not slow demand enough on their own to address this. If we do not act, these price pressures will spread and the eventual adjustment would be harder.”
The governor couldn’t say whether the March 2026 hike was a preemptive strike against inflation or one of many expected hikes, and noted the RBA’s goal is always the two-fold: keeping a lid on inflation and protecting the jobs market.
Additionally, RBA deputy governor, Andrew Hauser, told a New York University forum that the RBA wants to avoid a stagflation situation, describing it as “a central banker’s nightmare.”
ANZ: RBA hiking despite softer inflation
While ANZ said that inflation was softer than expected in the first quarter of 2026, it remains above the RBA’s target band. It expects the RBA will hike the cash rate by 25 points at its May meeting.
According to ANZ economists Madeline Dunk and Adam Boynton:
“With annual growth in underlying inflation at 3.5% year-on-year and additional price pressures expected to come through due to higher fuel and other costs, the RBA is likely to remain cautious around the inflation outlook.”
ANZ forecasts a pause in the hiking cycle following the May meeting but notes “the focus will be on the extent that higher fuel and other costs spillover to consumer prices more broadly.”
Commonwealth Bank: Rate hike is not guaranteed
While the Commonwealth Bank economists have forecast the RBA will raise the cash rate in May, it counters that a hike is “not guaranteed”:
“Over the past eight weeks the war has created significant uncertainty for the path of growth and inflation,” said Commonwealth Bank head of Australian economics, Belinda Allen. “All outcomes for the conflict are still on the table: escalation, impasse and peace. All with widely different outcomes making forecasting and policy setting extremely difficult.”
In this uncertain environment, Commonwealth Bank forecasts another “line ball” rate hike, thanks to steady trimmed mean inflation and recent falls in consumer sentiment.
Looking ahead, Commonwealth Bank expects the RBA to keep rates on hold while consumer spending slows under the weight of three rate hikes and higher energy prices, though this could change.
NAB: Waiting to see the impact of higher fuel prices
NAB economists expect the RBA to lift the cash rate by 25 basis points in May, before pausing to assess how higher fuel prices and tighter financial conditions flow through the economy:
“The risk the RBA is managing is whether higher fuel prices become embedded in broader inflation expectations," said NAB head of Australian economics, Gareth Spence. “This is a difficult policy environment, with inflation already elevated and the economy running close to full capacity.”
The predicted pause is expected to last until mid-to-late 2027, when NAB expects the RBA will be able to “normalise” rates. Additionally, if oil and energy shortages eat into economic growth, the RBA could “pivot quickly to a more dovish stance.”
Westpac: More hikes are on the horizon
Westpac economists not only predict the RBA will raise the cash rate in May, but also forecast two more rate hikes to come in June and August. That would bring the cash rate to 4.85% – a height not seen since November 2008, in the middle of a dramatic cutting cycle spurred by the Global Financial Crisis.
“Together with the spike in both consumer inflation expectations and business survey measures of costs and prices, the March inflation data will have the RBA’s inflation warning lights flashing bright red," said Westpac group chief economist, Luci Ellis. “The Monetary Policy Board will see an imperative to address high inflation despite the caution expressed by the minority voters in March.”
That said, the board could end up making fewer rate hikes than Westpac predicts. The RBA’s refreshed Statement on Monetary Policy, due for release alongside the May update, could shed more light on what the central bank thinks of Australia's inflation situation.