EGU
Principled Wealth Management, Practical Business Advisory, Precise Accounting and Taxation
CANVA EAT 35.jpg

Insights

Insights

Three hikes, back to the peak: what 4.35% means for Australian investors

The Reserve Bank of Australia raised the cash rate to 4.35% at its May meeting — the third consecutive increase of 2026. The significance of that number is not the increase itself. It is where it returns us to. The three hikes of 2026 have precisely offset the three cuts of 2025. The cash rate now sits at the peak of the previous cycle, a level last seen before the easing began. For borrowers and investors who spent 2025 adjusting to falling rates, the adjustment has fully reversed.

How we arrived here

The cause is no longer in doubt. The Iran conflict, the closure of the Strait of Hormuz, and the resulting surge in global energy prices fed directly into Australian inflation through the fuel channel. The RBA, judging that the inflation risk outweighed the risk to growth, moved to contain it. The May decision was not unanimous — one board member voted to hold, placing greater weight on the risk that the oil shock would itself dampen demand. The majority disagreed.

That dissent is worth noting, because it captures the genuine uncertainty in the current environment. The RBA is navigating between two risks: tightening too much into an economy that the energy shock may already be slowing, or tightening too little and allowing inflation to become entrenched. Reasonable people inside the Board disagree on the balance.

Where to from here

The RBA meets again on 15–16 June. Market economists are divided. Some expect a pause, reasoning that the Board will want to see the June quarter CPI data before moving again. Others believe August is the more likely moment for any further increase, with one major bank forecasting two more hikes in 2026 — which would take the cash rate to a level not seen since 2008.

We do not position portfolios on the basis of rate forecasts, for reasons the past eighteen months have made abundantly clear. In early 2025, the consensus was for steady cuts through 2026. That consensus was wrong, undone by an event almost no one anticipated. The lesson is not that forecasters are incompetent. The lesson is that the rate path is genuinely uncertain, and a portfolio built on a confident prediction of that path is a portfolio exposed to being wrong.

The implications for borrowers

For clients with variable rate debt, the full reversal of the 2025 cuts means the repayment relief of last year has disappeared. A borrower who structured their finances around the lower rates of 2025 should revisit that structure now. The questions are the same ones that matter in any tightening environment: what is the actual rate on each facility, what refinancing options exist, and is there sufficient liquidity to absorb a further increase without forcing a decision at the wrong moment.

For clients approaching the end of the financial year, the rate environment also bears on the timing of any major financial decisions. Higher rates change the relative attractiveness of paying down debt versus deploying capital elsewhere. These are calculations worth doing deliberately rather than by default.

The implications for portfolios

A cash rate at 4.35% has consequences across asset classes. Cash and short-duration fixed income now offer genuine yield for the first time in years — a meaningful consideration for the defensive portion of a portfolio. Longer-duration fixed income and rate-sensitive equities face headwinds. Residential property, already adjusting, contends with higher borrowing costs and softer sentiment.

None of this argues for wholesale repositioning. It argues for ensuring the portfolio is constructed with a clear-eyed view of the rate environment — neither assuming a swift return to cuts nor assuming rates remain elevated indefinitely, yet positioned to perform across both possibilities.

What we are watching

The single most important variable remains energy. If the ceasefire in the Middle East holds and the Strait of Hormuz returns to normal traffic, the primary driver of Australia's inflation overshoot fades, and the RBA gains room to pause and eventually ease. If the conflict reignites and energy prices climb again, the Board's task becomes considerably harder.

We are watching the energy situation, the June quarter CPI release, and the RBA's guidance closely. If you would like to review how your portfolio and debt position is structured for this environment, we welcome the conversation.

Ben Widdup
Wealth Manager

1300 102 542 | 0402 633 205
ben.widdup@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Ben Widdup