RBA Raises Cash Rate to 4.10%: What It Means for ASX Bank Dividends

The RBA Moves Again

This afternoon, the Reserve Bank of Australia raised the official cash rate by 25 basis points to 4.10%. It is the second hike in a row, following February's increase from 3.60% to 3.85%.

What made today's decision interesting was how close it was. Five board members voted to raise rates. Four voted to hold. That kind of split does not usually signal a central bank that is done tightening. For income investors who hold ASX bank stocks, that is an important detail worth paying attention to.

Why Did the RBA Raise Rates?

The short answer is that inflation is still too high.

Headline inflation came in at 3.8% for January 2026, well above the RBA's 2 to 3% target band. On top of that, the ongoing conflict in the Middle East has pushed global energy prices sharply higher, adding fresh pressure to an already stubborn inflation problem.

RBA Governor Michele Bullock put it plainly at today's press conference: "Inflation was already too high, reflecting the fact that demand is outstripping supply." She added that the split vote was about timing, not direction; all Board members agreed another rate rise was needed.

Is another hike coming? Economists at both ANZ and NAB expect a further 25 basis point increase in May, which would take the cash rate to 4.35%. That would effectively wipe out all three rate cuts delivered in 2025.

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What This Means for Bank Earnings

Rising rates have a complicated relationship with bank profits. In the short term, they can actually help. When rates go up, banks can charge more on variable home loans, and deposit rates tend to take longer to follow. That gap, known as the net interest margin (NIM), temporarily improves.

But the longer-term picture is trickier.

With variable home loan rates now approaching 6.00% p.a. on average, more borrowers will feel the squeeze. As mortgage stress rises, banks tend to set aside more money to cover potential bad loans. That weighs on profits, and profits are what fund dividends.

It is not a reason to panic, but it is a reason to look more closely at which banks are best placed to hold their payouts.

Are Bank Dividends Still Worth It?

This is the question most income investors are now asking.

With savings accounts potentially paying around 4.50% p.a. after today's hike is passed through, cash is starting to look more competitive. For some investors, a no-risk term deposit is genuinely tempting.

But here is where bank dividends in Australia still have a real edge: franking credits.

CBA, NAB and Westpac pay fully franked dividends, while ANZ's dividends are currently only partially franked, worth keeping in mind when comparing after-tax yields. For Australian taxpayers, those franking credits effectively add to the after-tax return. A grossed-up yield can end up well ahead of what a savings account offers, depending on your tax rate. That tax advantage does not disappear just because rates are higher.

Current trailing yields across the big four range from roughly 3.3% for CBA (ASX: CBA) up to around 4.5% for ANZ (ASX: ANZ), with NAB (ASX: NAB) and Westpac (ASX: WBC) sitting in between. On a grossed-up basis, the numbers improve materially for taxpaying investors.

The key things to watch going forward are payout ratios, capital adequacy levels, and any early signs of rising loan arrears as the rate cycle continues.

Key Takeaways

• The RBA has now raised rates twice in 2026, and another hike in May is widely expected
• Rising rates can temporarily boost bank earnings, but growing mortgage stress is a risk to watch
• Fully franked dividends still give Australian investors a meaningful tax advantage over cash alternatives

The interest rate impact on banks is not black and white. For investors building or maintaining an income portfolio on the ASX, the franking credit advantage remains real, but dividend sustainability deserves closer scrutiny than it did a year ago.

Want to go deeper? ASR's Income Report covers dividend sustainability, franking credit strategies, and payout risk across ASX financials.

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