RBA Governor Michele Bullock Warns Australians: 'We Are Poorer and There Is No Way Out of It' as Rates Hit 4.35%

Key facts

• RBA board raised the cash rate by 0.25 percentage points to 4.35% on Tuesday, May 5.
• Inflation hit 4.6% in the year to March, the highest in two and a half years.
• Petrol prices spiked more than 30% in the month, accounting for most of the inflationary uplift.
• Financial markets had priced in an 80% chance of a rate rise before the decision.
• RBA Governor Michele Bullock stated: 'We are poorer and there is no way out of it'.
• Approximately 3.6 million Australian households are paying down a mortgage.
• The RBA's two mandates are to keep inflation between 2% and 3% and support full employment.
• Deutsche Bank chief economist Phil O'Donaghoe called the potential hike a 'Hormuz hike'.

A Bitter Pill for Mortgage Holders

The Reserve Bank of Australia delivered a third straight interest rate rise on Tuesday, lifting the cash rate by 0.25 percentage points to 4.35 per cent, its highest level in 12 years. The decision, announced at 2:30pm AEST, came as no surprise to financial markets, which had priced in an 80 per cent probability of a hike. For the roughly 3.6 million households with a mortgage, the increase adds hundreds of dollars to monthly repayments, compounding the pain of a cost-of-living crisis that has seen petrol prices surge more than 30 per cent in a single month. Governor Michele Bullock offered little comfort, telling Australians bluntly: 'We are poorer and there is no way out of it.'

Inflation Surges to 4.6% as Oil Prices Spike

The decision was driven by official figures released last week showing inflation jumped by almost a full percentage point to 4.6 per cent in the year to March, the highest in two and a half years. The spike was largely fuelled by a more than 30 per cent rise in petrol prices, itself a consequence of escalating conflict in the Middle East. Economists noted the irony: interest rate hikes cannot directly affect the price of oil, which is determined by global supply disruptions. 'There is absolutely nothing that monetary policy can do about inflation in the next six months: it's all the oil price,' said Phil O'Donaghoe, chief economist at Deutsche Bank, who nonetheless supported the rate rise.

The 'Hormuz Hike': A Signal to Price Setters

O'Donaghoe described the expected increase as a 'Hormuz hike', a reference to the Strait of Hormuz, a critical chokepoint for global oil shipments. He argued that the RBA's primary motivation was not to tame immediate price pressures but to send a credible signal to businesses and workers that it remains committed to its 2-3 per cent inflation target. 'If they do follow through with another one, it is specifically about demonstrating to price and wage setters in the economy that they are serious about the inflation target,' O'Donaghoe said. 'And the best way it can do that at this point in time is with interest rate hikes.'

RBA Board Weighs Conflicting Data

The nine-member RBA board, which meets eight times a year, faced a difficult call. While underlying inflation remained stubbornly high, some indicators suggested it may have steadied. Most economists from the 'big four' banks had predicted the 0.25 percentage point increase, but a minority argued for holding rates steady. The central bank's dual mandate—to keep inflation between 2 and 3 per cent and to support full employment—left little room for manoeuvre. With the labour market still tight and wages rising, the board judged that a further tightening was necessary to prevent inflation from becoming entrenched.

Treasurer Responds as ASX Narrows Losses

The rate decision rippled through financial markets. The ASX 200 initially fell but narrowed its losses by the close, while the Australian dollar weakened after Bullock described interest rates as 'a bit restrictive'. The Treasurer issued a statement acknowledging the decision, though details of his response were not immediately available. For households, the immediate impact is clear: higher mortgage repayments, already stretched by rising rents and grocery bills. The broader question—whether monetary policy can address supply-driven inflation—remains unresolved.

What Comes Next: More Pain or a Pause?

With inflation still well above the RBA's target band and global oil prices volatile, the path forward is uncertain. Financial markets are pricing in a possible further hike later in the year, though much depends on whether geopolitical tensions ease and petrol prices stabilise. Governor Bullock's stark warning—'we are poorer and there is no way out of it'—suggests the central bank sees no quick fix. For now, Australians must brace for a prolonged period of high interest rates and elevated living costs, with the RBA's only tool—monetary tightening—offering little relief from the global forces driving inflation.

The bottom line

• The RBA raised the cash rate to 4.35%, the highest in 12 years, in its third consecutive hike.
• Inflation surged to 4.6% in March, driven largely by a 30% spike in petrol prices from Middle East conflict.
• Governor Bullock delivered a blunt message that Australians are poorer and must accept higher costs.
• Economists acknowledge rate hikes cannot address oil-driven inflation but see them as a necessary signal.
• Approximately 3.6 million mortgage-holding households face increased financial strain.
• The RBA's dual mandate of inflation control and full employment leaves limited policy options.