Last month, the Reserve Bank increased rates in its most divided vote since it began publishing tallies. The board says it doesn’t know where rates will head from here, and all of the above hinges on how the conflict in the Middle East plays out.
Key Highlights
- The RBA lifted rates 25 basis points to 4.10% in March.
- Board members say it is not possible to have confidence in predicting the future path for rates given the war.
- If oil remains at about $US100 a barrel, headline inflation could reach 5% in the June quarter, says the RBA, up from the current 3.7%.
- Markets currently place a 60% chance on another hike in May.
RBA Hiked Remains Uncertain about Future Rate Hikes
At its March meeting, the Reserve Bank of Australia increased its cash rate 25 basis points to 4.10%, the second rise this year and reversing two of three cuts made in 2025. But it was not a simple decision. The vote in favour of the increase by 5-4 marks the tightest decision.
The minutes, which were released on Tuesday, indicated that the five who voted for the hike believed monetary policy was still too loose and that conflict in the Middle East was more likely to exacerbate inflation than alleviate it. It was important, they said, to show a strong commitment to reining inflation back in around a target even if the war introduces unknowns for how the economy will respond
The Four Who Voted No, And Why They Wanted to Wait
The four board members who opposed the March hike weren’t convinced that the labour market had tightened as much as more of their colleagues thought. They also cited weaker household consumption as a cause to pause and wait for more evidence before taking another step.
Their worry was simple, hike too fast and you put the economy at risk of a downturn just as it is grappling with the shock of higher energy prices. The minutes make clear they saw value in waiting longer because the ultimate economic effects of the Middle East conflict on domestic conditions had yet to come into view. That four-way divide is an active tension within the board as May approaches.
What the RBA Said About Inflation and Threats From Oil Prices
The minutes were blunt about the inflation risk. If oil prices remain near $US100 a barrel, the RBA calculates headline inflation would be about 5% in the June quarter, up from an already high reading of 3.7% in February. That is a large increase in a very short time frame.
The board also recognised that a prolonged conflict could have an impact on both inflation and economic activity, in either direction. If the war were to drag on and be harmful for consumer spending, the RBA said its capacity to respond by cutting rates in a hurry would not be compromised by having raised them now.
Where Rates Go Next And Why Nobody Knows
The minutes from the meeting were strikingly frank, saying in no uncertain terms that in the present environment it was impossible to know what future interest rate path would look like with any degree of confidence. That is an uncommon admission for a central bank, and it conveys how truly uncertain the outlook is at the moment.
Markets are priced for a 60% chance of another hike in May; with 65 bps more of tightening by December 2026 taking the cash rate to 4.75%. Whether it does depends to a large degree on whether the Middle East conflict escalates, stabilises or gets resolved.
FAQs
- What did the RBA do in March?Â
In a narrow 5-4 vote, it raised the cash rate by 25 basis points to 4.10%.
- Why was the vote so close?Â
Five members thought that more tightening was necessary to combat inflation risks from the war in the Middle East. Four members preferred to wait and see how the conflict would impact the economy before taking further action.
- How high could inflation go?Â
The RBA said that if oil is near $100 a barrel, inflation in the June quarter could be about 5%, up from 3.7%in February.
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