The Reserve Bank governor has unleashed at the Albanese government, saying its spending while resources are limited is a major factor in persistent inflation.

At its meeting on Tuesday, the RBA board headed by Michelle Bullock decided to increase the cash rate by 0.25 points to 4.35 per cent in a troubling blow for Australian mortgage holders.

The decision was prompted by persistent inflation, which Treasurer Jim Chalmers earlier this year claimed the government had tamed. Australian Bureau of Statistics revealed last week that headline inflation had picked up to 1.1 per cent in March.

Annual inflation is at 4.6 per cent, up from 3.7 per cent, which marks the fastest annual pace of price growth since September 2023.

In a statement, the RBA noted that inflation had picked up 'materially' in the second half of 2025, and had then been boosted because of the conflict in the Middle East. 

A regular refrain from Ms Bullock in her 45-minute press conference on Tuesday was that the board was working to stop inflation, which is already 'too high'. The only tool the RBA has to achieve this is to raise cash rate, which dampens spending.

But Bullock brutally took aim at the Albanese government's attempts to buy votes.

'The extent to which (the) government makes up (budget) shortfalls for households by giving them more money makes it harder to dampen demand,' she said.

She said even before the Iran conflict broke out, demand in Australia was above supply, which raises prices. 

'The ability of the economy to supply the goods and services that were being demanded in total, including by government and by the private sector, was outstripping the ability of the economy to supply it. 

'That's why inflation was rising.'

Ms Bullock highlighted that the RBA decision was a move to slow down demand. 

'If we are increasing interest rates, what we are trying to do is slow growth in demand and that hits the private sector – typically consumption, investment, those sorts of things,' she said.

'The extent that the government is demanding goods and services of the economy - whether it's direct expenditure or giving money to households to spend on goods and services in the private sector - that adds to demand.'

Ms Bullock went on to say that that Australians have been left poorer in the wake of surging oil prices amid the ongoing conflict in the Middle East. 

She also warned more interest rate increases could be on the way as inflation threatens to climb further if the government does not tighten its spending. 

'Developments in the Middle East remain highly uncertain but under a wide range of possible scenarios, the conflict adds to global and domestic inflation,' she said.

'If left unchecked, higher costs get embedded into price and wage-setting decisions.

'These second-round effects could lead to even higher and more persistent inflation and if so, would require even more tightening in monetary policy to get inflation under control.'

For an owner‑occupier with a $600,000 mortgage and 25 years remaining at the start of this year's hikes, another 0.25 adds $91 to their minimum monthly repayments. 

The total increase across the three hikes since February would be $272 a month.

The increase will lift the average owner‑occupier variable rate to 6.26 per cent, pushing it above the 6.25 per cent mark for the first time since January 2025.

Earlier on Tuesday, Treasurer Jim Chalmers had attempted to blame the interest rate hike solely on the war the United States and Israel undertook against Iran.

'Australians are already paying a hefty price for the war in the Middle East and this decision will make it tougher,' Chalmers said in a statement.

'What we saw in the month of March was overwhelmingly a story of higher petrol prices before our fuel tax cut kicked in. Higher petrol prices are all about the war in the Middle East,' he said.

'Any objective observer would conclude that now. When it comes to decisions taken in Washington DC, or indeed in Tehran, Australians are hostage to those decisions taken about the conduct of this war and the end of this war.'

The decision to hike interest rates is just one week before the Treasurer is due to announce the Labor government's fifth Federal Budget.

'The uncertainty and volatility in the global economy mean there is an even greater premium on responsible fiscal management,' he said on Tuesday.

'The budget is already more than $233billion better than we inherited because the Government has found savings, kept a lid on spending growth and banked revenue upgrades.

'In the upcoming Budget, we'll continue that record of responsible economic management by saving more than we spend and banking all upward revisions to revenue.

'This Budget will be focused on fuel security, addressing inflation, boosting productivity and resilience and managing global economic uncertainty, and today's decision highlights why this is so important.'