The Reserve Bank of Australia raises interest rates for the second consecutive time to 4.1%, as conflicts in the Middle East push up inflation risks

# Long Yue

Source: Wall Street CN

The Reserve Bank of Australia (RBA) has raised interest rates for the second consecutive meeting, hiking by 25 basis points to 4.1%, with the decision passed by a **5‑4 vote**. The RBA warned that the Middle East conflict is pushing up oil prices and inflation expectations, and inflation may stay above target for some time. Markets have since increased bets on another 25 bp hike to 4.35% in May. Following the announcement, the Australian dollar dropped sharply, and Australia’s 3‑year government bond yield fell 9 basis points.

On March 17, the RBA raised interest rates by 25 basis points to 4.1%, in line with market expectations.

This marks the first back‑to‑back rate increase since mid‑2023 and partially reverses last year’s easing cycle, which saw **75 basis points of cuts over six months**. The Board approved the decision by a narrow 5‑4 vote.

In its statement, the RBA said the Middle East situation “could lift both global and domestic inflation under a range of scenarios”. Short‑term inflation expectations have risen, and inflation is likely to remain above the target range for a period. The Bank highlighted the “material risk” of inflation staying above target for an extended period.

The RBA said it would “do whatever is necessary” to achieve its price and employment goals, adding that monetary policy is well‑positioned to respond to developments. It emphasized significant uncertainty around the economic and inflation outlook, with ongoing attention to data, evolving market conditions, and risks in the decision‑making process.

Most economists expect the RBA may deliver another 25 bp rate rise in May, taking the cash rate to **4.35%** and fully reversing last year’s 75 bp of cuts.

After the rate hike, AUD/USD fell sharply, and Australia’s 3‑year government bond yield declined by 9 basis points.

## Middle East conflict lifts oil prices, raising inflation risks

The RBA put external shocks front and center. The statement noted that the Middle East conflict has caused a sharp rise in fuel prices and poses a major risk to both global and domestic inflation.

Since late February, attacks by the United States and Israel against Iran, followed by Iranian counterstrikes against neighboring countries, have drawn more than a dozen nations into the conflict.

The Strait of Hormuz — which links the Persian Gulf to global markets and carries roughly **one‑fifth of the world’s oil supply** — has been effectively closed, sending oil prices soaring and creating significant upside risks to global inflation.

In the fourth quarter of last year, Australia’s core inflation measures — a key focus for the RBA — remained elevated, well above the **2%–3% target band**. At the same time, the unemployment rate unexpectedly fell to 4.1%, 0.3 percentage points below the RBA’s forecast.

Stephen Miller, Investment Strategist at GSFM, stated bluntly:

“Inflation is a real and pressing threat, and responding with rate hikes now is the appropriate course. Failure to act could force more aggressive policy tools later.”

Nick Stenner, strategist at Bank of America, also noted that with inflation persistently above target and facing upside risks, “leaving rates unchanged would raise questions about the central bank’s commitment to price stability”.

## Next stop: May. Household cost pressures and inflation warnings intensify

Following the latest increase, most economists surveyed by Bloomberg expect the RBA to hike again by 25 basis points in May, pushing the cash rate to 4.35% and fully unwinding last year’s 75 bp of cuts.

Ahead of this meeting, economists at Westpac, NAB, Citi, and Deutsche Bank had upgraded their forecasts to predict a rate hike this week. Westpac and NAB also expect a further increase in May. The Chief Executive of Westpac said ahead of the meeting that he believed households could absorb two more 25 bp increases.

Inflation warnings are growing louder. Some economists expect Australian CPI could reach **5%**. Treasurer Jim Chalmers said on Sunday that households may face greater cost‑of‑living pressures, warning inflation could rise above **4.5%**.

This is higher than the RBA’s February forecast of a **2026 peak of 4.2%**, which was based on technical assumptions including oil prices holding at USD 63.80 per barrel through mid‑2028 and a cash rate of 4.2% by December 2026.

In the near term, markets will focus on the RBA’s February labour force report due on Thursday and next week’s monthly inflation data, to gauge whether a May hike moves from expectation to reality.

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