The Reserve Bank of Australia (RBA) has decided to increase the official cash rate by 25 basis points to 4.35%, according to a Tuesday statement by the central bank.
The bank said inflation picked up materially in the second half of 2025, with information since the beginning of 2026 confirming that some of the increase reflected greater capacity pressures.
The RBA noted that the Middle East conflict has resulted in sharply higher fuel and related commodity prices already adding to inflation, with early signs that many firms experiencing cost pressures are looking to increase prices of goods and services.
The RBA's baseline forecast, which assumes the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than expected in February before declining as demand growth slows and capacity pressures ease in response to higher interest rates, the statement added.
Financial conditions have tightened this year, with money market interest rates, government bond yields, and the exchange rate all rising, although credit remains readily available to both households and businesses, the bank said.
The RBA said a longer or more severe conflict could put further upward pressure on global energy prices, pushing up near-term inflation and potentially embedding higher prices into longer-term inflation expectations, while higher prices and prolonged uncertainty may also weigh on growth in Australia's major trading partners and domestically.
Higher fuel prices are adding to inflation, with indications of likely second-round effects on prices for goods and services more broadly, on top of the high inflation recorded around the start of 2026, reflecting capacity pressures, according to the statement.
In light of these considerations, the board assessed that inflation is likely to remain above target for some time with risks tilted to the upside, making a rate increase appropriate, with eight members voting to raise the cash rate and one member voting to leave it unchanged at 4.1%, the RBA said.