RBA minutes: Eight of nine members backed May hike as inflation expectations risk grew
RBA minutes show eight of nine board members backed the May rate hike to 4.35%, citing rising inflation risks from the Gulf conflict, with markets now pricing a 75% chance of a further August rise.
Earlier:
Summary:
Source: Reserve Bank of Australia minutes of the May board meeting, released Tuesday 18 May 2026.
- The board considered two options: hold at 4.10% or raise by 25 basis points to 4.35%, fully reversing the easing delivered in 2025
- Eight of nine members judged the case for a hike to be stronger, citing rising inflation risks and a lack of confidence that 4.10% was sufficient to offset those risks
- The majority flagged that core inflation was projected to remain above target for an extended period and saw a risk that longer-term inflation expectations could become de-anchored
- The board judged financial conditions would be somewhat restrictive after the hike, giving it space to assess how households and businesses respond to the Middle East conflict
- Members agreed monetary policy could not alter the near-term trajectory of inflation, and that economic growth would likely remain below potential for some time
- Additional loosening in labour and product markets was judged necessary given the inflation risk environment
- The one dissenting member argued capacity pressures were not as acute, that a prolonged war posed more of a risk to demand than inflation, and that inflation could return to target without further tightening
- Markets are pricing an August hike at around 75%, with the cash rate seen peaking at 4.60% and some chance of reaching 4.85%
- The RBA’s baseline forecasts assume the Strait of Hormuz reopens soon, a scenario that remains distant given Brent crude hovering around $110 a barrel
- The board also discussed a framework for additional monetary policy tools to prepare for a scenario where rates fall to very low levels again
The Reserve Bank of Australia’s May board meeting produced an 8-1 vote in favour of raising the cash rate to 4.35%, with the minutes revealing a board increasingly alarmed by the risk that prolonged energy-driven inflation could cause longer-term price expectations to slip their moorings.
Released on Tuesday, the minutes of the May meeting show the board weighed two options: holding the cash rate steady at 4.10% or raising by 25 basis points to fully reverse the policy easing undertaken in 2025. The majority concluded that 4.10% was no longer sufficient to offset the inflation risks accumulating from the Middle East conflict, with core inflation projected to remain above the RBA’s target band for an extended period.
The board was explicit about its core concern. The risk that longer-term inflation expectations could become de-anchored was cited as a material factor in the decision to act, a formulation that signals the RBA is not simply reacting to near-term price data but is attempting to prevent a more damaging shift in how businesses and households form their inflation assumptions. That framing gives the tightening cycle an open-ended quality: the board will keep hiking as long as it judges expectations to be at risk, regardless of what the near-term data shows.
The minutes acknowledged a tension at the heart of the decision. Members agreed that monetary policy cannot alter the near-term trajectory of inflation, given its supply-side origins in the oil shock, and that economic growth will likely run below potential for some time. In other words, the RBA is tightening into a slowdown, a choice the majority justified on the grounds that allowing inflation expectations to drift would create a far more damaging and costly problem to solve later.
The hike was also framed as creating optionality. With financial conditions judged to be somewhat restrictive at 4.35%, the board said it now has the space to watch how households and businesses respond to the conflict before deciding on next steps. Additional loosening in labour and product markets was seen as necessary given the elevated inflation risk environment.
The lone dissenter took a meaningfully different view. That member argued that capacity pressures across the economy were not as pronounced as the majority believed, and that the greater risk from a prolonged Iran war was to demand rather than inflation. On that analysis, inflation could return to target without further tightening, making an additional hike an unnecessary imposition on an already slowing economy.
Markets have largely sided with the majority. An August rate hike is priced at around 75%, with the cash rate expected to peak at 4.60% and a non-trivial probability attached to a move as high as 4.85%. The RBA’s own baseline, however, assumes the Strait of Hormuz reopens in the near term, a scenario that looks increasingly difficult to sustain with Brent crude holding around $110 a barrel and no clear resolution in sight, even after Trump’s announcement of a pause in planned military action against Iran to allow diplomatic talks to proceed.
In a separate but notable addition, the board discussed the development of a framework for unconventional monetary policy tools, designed to ensure the RBA is prepared to act if interest rates were ever to return to very low levels. The inclusion of that discussion in the same meeting that delivered a hawkish hike underscores the unusual degree of two-sided uncertainty the board is navigating.
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The 8-1 vote split and the explicit reference to de-anchoring inflation expectations as a risk the board was actively trying to head off will cement market pricing for an August hike and keep the door open to a move toward the 4.60% peak currently priced. The board’s acknowledgement that monetary policy cannot alter the near-term inflation trajectory is a significant admission that frames future hikes as expectation management rather than immediate inflation suppression, a distinction that gives the RBA flexibility to pause if growth deteriorates sharply. The dissenting member’s view that a prolonged conflict poses more of a demand risk than an inflation risk is worth watching as a leading indicator of how the board’s calculus could shift if the Hormuz closure extends materially beyond the RBA’s baseline assumption of an early resolution. With Brent holding around $110 and the strait still closed, that baseline is already looking optimistic.
This article was written by Eamonn Sheridan at investinglive.com.