2026 has been turbulent so far… to say the least. The war in the Middle East has created the largest global energy shock since the oil crisis of the 1970s and 80s… And now, Australia is feeling the impacts. 

Headline inflation surged to 4.6% in March with warnings it could keep on rising. 

So it comes as no surprise that the RBA has decided to hike rates to 4.35%

It’s exactly what 30 out of 33 economists expected… ​Raising the official cash rate by 25 basis points to 4.35% on May 5.

And it’s exactly what millions of homeowners were praying would not happen (but deep down expected).

Why did most economists predict a rate increase?

Since the middle of last year, inflation has been creeping up. It’s been above the RBA’s 2%-3% target - and the central bank’s been raising rates since February to try to control spending. 

Refresher: Inflation measures the increase in the prices of goods and services using the Consumer Price Index. When inflation is too high, the RBA can raise the cash rate as a tool to slow spending and borrowing.  

So what were the key drivers of inflation? Well, fuel prices in March were 10.7% higher than the previous peak in September 2023….And headline inflation dramatically increased at an annual pace of 4.6% (up from 3.7% in February). Yikes!

Meaning Australians are paying a huge price for the war in the Middle East.

You’re probably wondering: will inflation continue to bite our backpockets?

The answer is…nobody really knows (sorry!).

What we do know is that the RBA was already dealing with a homegrown inflation creeping up before the conflict in the Middle East erupted. So what happens next has a lot to do with what's going on overseas (and the RBA can’t really control that)...

What can it control? Steering Australia’s medium to long-term economy, and pulling the levers it can to manage inflation. That’s where the cash rate comes in. 

So while the central bank hiked up the cash rate today….looking past this month is pretty uncertain.

The three big banks: ANZ, ​CBA and NAB all expect rates ​to hit a peak at 4.35%.. while ⁠Westpac’s predicting a massive 4.85%.

The majority of economists expect the cash rate not to go higher than 4.35% for the rest of the year…but more than a third now reckon rates will climb to at least 4.60% by the end of the third quarter.  

That’s not what they were saying even just a month ago. 

So what happens when the cash rate goes up?

If you’ve got a variable-rate home loan, this could add a few hundred bucks a month onto your repayments… which means less to spend on other essentials.😔 

Savers, good news for you! You might see interest on your accounts go up. It’s worth shopping around or parking cash in high interest saver accounts for maximum gains!