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 members 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 28 February 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 $U$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 on 28 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,” he 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.
However, some economists said the RBA had to dampen the level of demand in the economy anyway, to bring the economy into better balance, and today’s rate hike would help to achieve that.
They said interest 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.
In a statement accompanying its rate decision today, the RBA Board said a wide range of data over recent months have confirmed that inflationary pressure picked up materially 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.”
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