RBA lifts interest rates by 0.25pc for second time this year

The Reserve Bank has increased interest rates by 0.25 percentage points.

The new cash rate is 4.1 per cent, up from 3.85 per cent.

The RBA has now lifted rates twice in two months (once in February, and again in March).

Today’s rate hike was highly anticipated.

Early last week, RBA deputy governor Andrew Hauser said high inflation was “toxic” and that the RBA board was determined to bring inflation down, and traders interpreted his comments as being extremely “hawkish” (pointing towards a rate hike).

On Friday, ANZ increased its fixed mortgage rates by up to 0.25 percentage points in anticipation of the RBA lifting rates today.

The RBA board’s policy decision was made by a slim majority: five members voted to increase the cash rate by 25 basis points to 4.10 per cent, while four voted to leave the cash rate target unchanged at 3.85 per cent.

War in the Middle East, petrol prices and inflation

The outbreak of war in the Middle East on February 28 has had global ramifications for oil and gas markets.

Fuel prices have jumped dramatically in Australia in recent weeks, exacerbated by motorists panic-buying.

At the end of February, Brent crude oil was trading at about $US70 a barrel.

But prices have surged since the outbreak of war, touching $US116 a barrel last week. It is currently trading at about $US103 a barrel.

Last week, NAB economists warned the rapid increase in the price of fuel in Australia could push inflation above 5 per cent next quarter if the war was not resolved quickly.

Treasury officials have arrived at a similar conclusion.

They say headline inflation will be 0.5 percentage points higher next quarter if the price of crude oil averages US$100 a barrel for three months, or 1 percentage point higher if it averages US$120 a barrel.

Headline inflation is currently running at an annual pace of 3.8 per cent. The RBA wants it sitting at 2.5 per cent.

Are rate hikes the best response to oil price shocks?

Some economists do not think the RBA should lift interest rates to combat an energy price supply-side shock.

But before the outbreak of war in February, RBA officials were already laying the groundwork for rate hikes.

In January and early February, they said the world’s economies had been powering ahead recently.

They said domestic demand had also been stronger than anticipated in Australia in recent months, and Australia’s economy was probably operating at levels beyond its capacity, which was contributing to inflationary pressures.

RBA deputy governor Andrew Hauser said the RBA’s post-COVID inflation-fighting strategy had also potentially made Australia’s economy more susceptible to shocks.

“We had a different policy strategy to other countries,” Mr Hauser said in February.

“We didn’t raise interest rates as far up during the COVID inflation boom, and that meant we were slower to bring them down as well.

“The consequence of that, and I think it’s fair to say, is this economy is closer to balance than many of the other economies you might have in mind …

“In a way, the backside of that success, of keeping the economy close to balance, is that even relatively small demand shocks of the kind we had last year can lift inflation a bit and cause [monetary] policy to need to respond,” he said.

In a statement on Tuesday, the RBA board said a wide range of data over recent months have confirmed that inflationary pressure picked up materially in Australia in the second half of 2025.

“While part of the pick-up in inflation is assessed to reflect temporary factors, the Board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed,” its statement said.

“Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.”

Oil price shocks are a central bank’s ‘worst nightmare’

Other economists said rates had to increase in Australia regardless of the war in the Middle East and the global spike in energy prices that has occurred recently.

But they said the war posed a challenging situation for central banks.

Anders Magnusson, BDO chief economist, says the war is making it harder for central banks because the “oil situation” is fundamentally a supply-side shock, which is not what inflation-targeting is built for.

“The only tool it has is the cash rate, which works by suppressing demand to bring it back into line with a now more constrained supply side. That can reduce inflation pressures, but it also lowers the living standards of Australians in the short term.

“At the same time, the war poses risks beyond inflation. Disrupted supply chains are less efficient, which can weigh on productivity and global growth.

“A broader global slowdown would flow through to Australia via weaker demand for our commodity exports. In that context, raising the cash rate adds additional risk to growth, and to the RBA’s other mandate — full employment.”

He said the decision to lift rates would have been “particularly difficult” for the RBA and that is why only a slim majority of the RBA Board voted for a hike.

“A more fundamental issue dominates the decision,” he said.

“Underlying inflation has remained persistently too high. That persistence limits the Bank’s tolerance for new inflation shocks, even when they originate offshore.

“The rate increase reflects both that structural inflation problem and the additional upward pressure on prices flowing from higher oil prices,” he said.

Harry Murphy Cruise from Oxford Economics says oil price shocks are a central bank’s “worst nightmare”.

“Absent the Middle East conflict, we think the RBA would have waited until May to hike,” he said.

“But the conflict changes the inflation game. Higher oil prices not only lift petrol prices but also raise production and transport costs across the economy, while disruptions to key fertiliser exports from the Middle East could push food prices higher.

“The only thing that will bring oil prices down is more supply flowing through the Strait of Hormuz — and no amount of interest-rate hikes will convince Iran to reopen that passage.

“Instead, the RBA must manage inflation (and inflation expectations) by slowing the rest of the economy. That means dissuading spending on other goods to offset the inflationary impulse from higher fuel costs,” he said.

The RBA was going to lift rates, it was just a matter of when

RBA governor Michele Bullock said higher petrol prices in Australia will add to inflation, but they are not the reason for today’s decision.

“We had a very robust conversation over the past two days about whether we should hold [interest rates] until May,” she said.

“This would have given us an opportunity to consider more data on inflation and the labour market, and it would have perhaps provided a bit more clarity on the potential impact of the conflict in the Middle East.

“But the discussion was very much centred around the timing of a rate increase,” she said.

Ms Bullock also said that the RBA board’s recent inflation-fighting strategy has not changed.

“The board’s strategy is still to try and bring inflation back without [creating] excess unemployment,” she said.

“We don’t want to see a recession or a large rise in unemployment if we can avoid it. That’s part of our dual mandate.

“But at the moment, the risks just tip more to the inflation side, given the [strong] position that the labour market is currently in,” she said.