Why the RBA could increase interest rates again in May

On Tuesday, as was widely expected, the Reserve Bank of Australia (RBA) delivered another blow to mortgage holders by increasing interest rates for the second month in a row.

The central bank lifted the cash rate by 25 basis points to 4.1% at March’s meeting.

The RBA explained:

A wide range of data over recent months have confirmed that inflationary pressures picked up materially in the second half of 2025. While part of the pick-up in inflation is assessed to reflect temporary factors, the Board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed. Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.

In light of these considerations, the Board judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations. It was therefore appropriate to increase the cash rate target.

What’s next for interest rates?

Last year, the RBA changed its meeting schedule from monthly to eight times a year.

One of the months that doesn’t have a meeting is April, which means the central bank has a bit of time to observe economic data, run its numbers, and ultimately make its decision on where interest rates are going next.

At present, the RBA Rate Indicator, which is based on the ASX 30 Day Interbank Cash Rate Futures May 2026 contract, suggests that there is a good probability of a rate increase at the May meeting.

The RBA Rate Indicator currently sits at 57% in favour of an increase to 4.35%. If this proves accurate, it will mean three meetings in a row of hikes to interest rates, much to the dismay of borrowers.

Will the RBA hike?

Unfortunately, the economics team at Westpac Banking Corp (ASX: WBC) appears to believe that the market is onto something with its prediction.

Australia’s oldest bank believes the RBA will increase interest rates in May, before pausing at 4.35% for the foreseeable future.

Westpac’s senior economist, Mantas Vanagas, commented:

Domestically, focus was on the RBA – as anticipated, the central bank raised the cash rate by 25bp for the second time this year, bringing it to 4.10%. The narrow 5–4 vote in favour of tightening highlighted significant differences of opinion within the Monetary Policy Board, however, Governor Bullock clarified at the press conference that these differences concerned the timing of the hike, not the direction of policy. We continue to expect another interest rate increase in May, though it will likely depend on developments in the Middle East conflict.

After a rate hike in May, Westpac expects rates to stay at 4.35% until late 2027. It then expects rates to fall to 3.6% by March 2028.

The post Why the RBA could increase interest rates again in May appeared first on The Motley Fool Australia.

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• Here’s what Westpac says the RBA will do with interest rates next week
• Here’s what experts think will happen with the RBA interest rate this month

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.