RBA hikes to 4.35% in 8–1 vote; June finely balanced

Market UpdateThe cash rate move and what it means

The RBA raised the cash rate by 25bps to 4.35% at its May meeting — the third consecutive hike of this cycle. The vote was 8–1, a decisive shift from the tight 5–4 split in March, signalling broad Board alignment on the need for further tightening.

The RBA cited second-round effects from Middle East fuel costs as exacerbating existing capacity pressures. Trimmed mean inflation is forecast to peak at 3.8% in Q2, with the RBA not expecting a return to the 2.5% target midpoint until June 2028.

Governor Bullock's press conference struck a more dovish tone than the statement, characterising the three hikes as addressing pre-conflict inflation. Markets now price only ~20% probability of a June move.

Notwithstanding, Westpac's assessment is that near-term inflation risks are tilted to the upside relative to RBA forecasts, with trimmed mean peaking at 4.0% and remaining elevated through 2026. Headline CPI is expected to reach 5.4% in Q2 before moderating.

Westpac currently forecasts the cash rate at 4.60% by June and 4.85% by September 2026, holding through late 2027 before easing to 4.35% by mid-2028. The 3Y Swap curve signals an eventual reversal, declining from 4.80% to 4.20% over the forecast horizon.

GDP growth is forecast to slow to 1.0% by year-end as rate hikes feed through, with unemployment expected to rise gradually to 4.9%. Consumer confidence remains near historic lows, underscoring the growth–inflation tension facing the Board.

Consumer ConfidenceSlight fall ahead of the RBA decision

Oil MarketsFresh clashes threaten diplomatic progress

• WTI crude recovered to above US$97/bbl on Friday after renewed military exchanges between US and Iranian forces cast doubt over the viability of ongoing negotiations. The US Navy conducted a show-of-force transit through Hormuz, though officials stressed the response was defensive in nature.
• A US proposal to reopen the strait and resolve the nearly 10-week standoff is now with Tehran, which is expected to deliver its position through Pakistani intermediaries within 48 hours. The broader region, including Lebanon, remains on edge.
• The IEA estimates the conflict has taken approximately 14m bpd offline globally and cautioned that even a resolution would see supply normalise only gradually, keeping energy markets tight into H2.

Foreign ExchangeAUD hits four-year high on peace-deal hopes

• The Aussie dollar extended its rally past 0.72 this week, touching levels not seen since mid-2022. The catalyst was a shift in geopolitical sentiment as signals that Washington and Tehran may be moving toward a negotiated resolution to the Hormuz crisis pulled the floor out from under safe-haven demand for the greenback.
• March trade data delivered an unwelcome surprise: a goods deficit of A$1.84bn, the first negative print in more than eight years. A surge in data centre hardware imports and elevated fuel costs from the conflict overwhelmed otherwise solid resource export volumes.
• Monetary policy divergence continues to underpin the AUD. This week's RBA hike to 4.35% widens the gap to a stationary Fed funds rate of 3.625%. Futures markets assign roughly 20% odds to a follow-up move in June, though a path toward 4.60% by September remains the base case in swaps pricing.
• The move is not purely an AUD story. The dollar index has retreated to a two-month trough after Tokyo intervened to prop up the yen, dragging USD/JPY to 157. The euro and sterling have firmed in sympathy, with EUR/USD at 1.17 and cable at 1.36.
• Westpac sees the pair consolidating around 0.72 through Q3, drifting higher to 0.73 by December and 0.74 by mid-2027 before retracing as the RBA eventually pivots to easing. The binary risk remains whether a diplomatic breakthrough unwinds the energy premium or an escalation reignites demand for the USD.

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Sources: Westpac Economics (4 May 2026), RBA Statement on Monetary Policy, ABS, ANZ-Roy Morgan, Trading Economics. This summary is for informational purposes only and should not be considered financial advice. Always consult a professional before making investment decisions.