The Reserve Bank of Australia (RBA) lifted interest rates by 25 basis points to 4.35 per cent, marking the third consecutive increase.

Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of this increase reflected greater capacity pressures. “In addition, the conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation. There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen,” said the RBA.

“The Bank has updated its forecasts to incorporate recent data and developments in the Middle East. The baseline forecast, which assumes that the conflict is resolved soon and fuel prices decline, sees underlying inflation peaking higher than was expected in February. It then declines as demand growth slows and capacity pressures ease in response to higher interest rates.

“Financial conditions have tightened this year. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated. But credit is readily available to both households and businesses.”

Australian retailers say trading conditions will become more challenging.

The decision adds to an uncertain consumer outlook, with households navigating higher borrowing costs alongside rising fuel and living expenses.

Australian Retail Council (ARC) Chief Economist Glenn Fahey said the latest increase will create pressure on both consumers and businesses at a time they can least afford it.

“With household budgets under strain, a third consecutive rate rise is expected to reduce spending, especially on non-essential items,” Mr Fahey said.

Though Australian Bureau of Statistics data released today ahead of the rate announcement points to some resilience in consumer spending, the cumulative impact of successive interest rate increases will weigh heavily on household spending in the months ahead.

At the same time, retailers are facing escalating cost pressures driven by global instability and fuel price increases.

ARC represents a sector worth $444 billion to the economy and employing more than 1.4 million Australians.

Recent ARC nationwide survey shows:

• Supply chain conditions have worsened over the past month for three in four businesses, with cost pressures intensifying across freight, logistics and energy
• Two in three retailers surveyed report a high or severe level of concern about trading conditions over the next three months
• Around half expect disruption to persist for at least six months.

“Retailers are doing everything they can to absorb higher costs, but the environment is becoming increasingly difficult,” Mr Fahey said.

“Margins are under pressure from both sides, with softening demand ahead and rising input costs occurring at the same time.”

Consumer sentiment remains subdued, with the latest Roy Morgan data showing confidence near 50-year lows.

Mr Fahey said the current conditions highlight the importance of broader economic reform, including through the Federal Budget next week.

“Retailers are managing through a cost-of-doing-business crisis, with pressure across wages, energy, rent, insurance and compliance,” he said.

“The Federal Budget must focus on practical reforms that reduce costs, improve productivity and reduce the cost of doing business.”

ARC is calling for:

• A nationally consistent, harmonised approach to cutting red tape and regulatory duplication
• Targeted action to reduce high-friction compliance, particularly for small businesses
• Modernised tax settings to lift investment and competitiveness
• Targeted relief to ease freight, logistics and energy cost pressures.

“These are measures that can ease cost pressures and support businesses through a challenging trading environment, which will flow through to lower prices for Australian households,” Mr Fahey said.