RBA's hawkish stance signals potential for further rate hikes, say experts

By Newsdesk

May 05 2026
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In a decisive move, the Reserve Bank of Australia (RBA) has raised the cash rate to 4.35%, following an 8-1 vote in favour of the hike. This decision marks the third consecutive increase, underscoring the central bank's commitment to tackling inflation despite the potential risks to economic growth. Experts from State Street, a leading global financial services provider, have weighed in on the implications of this policy direction.

RBA's hawkish stance signals potential for further rate hikes, say experts

Dwyfor Evans, Head of APAC Macro Strategy at State Street Markets, highlighted the strong consensus within the RBA for the rate increase. "An 8-1 vote in favour of a higher cash rate, so a near unanimous verdict to take the policy rate to 4.35%," he noted. This near-unanimous decision signals the RBA's unwavering focus on inflation control, even in the face of pronounced downside growth risks.

Evans further elaborated on the RBA's stance, explaining that the central bank's language remains hawkish. "Two successive hikes had opened prospects that a third hike might would prompt some moderation in language, but that is not evident in the statement," he said. The RBA's emphasis on rising headline and core inflation measures suggests that the bank is prioritising inflation control over growth concerns, a stance that could bolster the Australian dollar.

The State Street PriceStats data for Australia supports this view, indicating a broader uptick in prices. Evans pointed out that the underlying strength of the economy, particularly the labour market, suggests that further rate hikes may be on the horizon. "The underlying strength of the economy, specifically the labour market, is such that further hikes will be delivered in the cycle," he asserted.

Krishna Bhimavarapu, an economist at State Street Investment Management, echoed these sentiments, describing the RBA's approach as more hawkish than anticipated. "The RBA was more hawkish than expected, delivering a rate hike hat trick as it pushes back against rising inflation risks," he said. Bhimavarapu noted that the ongoing Iran war has exacerbated inflationary pressures, with higher energy and freight costs becoming more entrenched.

The geopolitical tensions, coupled with the RBA's hawkish stance, have led Bhimavarapu to revise his expectations for future rate hikes. "Until recently, we were expecting one more hike, but following overnight escalations in the Iran war, a more hawkish RBA today, and the risk of prices surprising already elevated expectations, we now see scope for up to two additional hikes," he explained.

Despite the potential for further rate increases, Bhimavarapu acknowledged that the RBA might eventually pause to evaluate incoming data. However, he emphasised that the threshold for such a pause has risen considerably. "While the Bank may eventually pause to assess incoming data, the bar has clearly risen," he said. Bhimavarapu also suggested that once inflation convincingly turns, the RBA could implement a faster easing cycle than in the past due to weak household demand and tight financial conditions.

The experts' analysis underscores the complexities facing the RBA as it navigates a challenging economic landscape. With inflation risks tilted to the upside and geopolitical tensions adding to cost pressures, the central bank's hawkish stance appears justified. However, the potential impact on growth and unemployment remains a critical concern, as reflected in Bhimavarapu's forecast of unemployment rising towards a 4.8% base case.

As the RBA continues to grapple with these challenges, the Australian economy's resilience, particularly in the labour market, will be crucial in determining the path forward. For now, the central bank's focus remains firmly on inflation control, with further rate hikes a distinct possibility in the months ahead.

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