Australia responds to global inflation pressures with rate hike

The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.1% at its March meeting, marking a second consecutive increase as policymakers seek to contain inflation amid rising global risks.

The decision, which reversed two of last year’s rate cuts, was narrowly split, with five board members voting in favour and four against — the closest outcome since voting details began to be disclosed, as per foreign media reports.

The central bank said inflation remains above its 2–3% target and risks have increased, particularly due to the Middle East conflict pushing fuel prices higher.

“Short-term measures of inflation expectations have already risen,” the board said, warning that sustained increases in oil prices could further add to inflationary pressure.

The move comes as other major central banks, including the Federal Reserve and the European Central Bank, are expected to hold rates steady.

Market reaction reflected uncertainty about further tightening. The Australian dollar edged lower, while bond yields declined, and expectations for another rate hike in May eased to around 30%.

Economists said the split vote highlights growing uncertainty, particularly linked to the conflict involving Iran and its potential impact on global energy prices.

The RBA had previously taken a more gradual approach to tightening, prioritising labour market strength. However, inflation has picked up again, with headline inflation at 3.8% in January and core inflation reaching a 16-month high of 3.4%. The labour market remains tight, with unemployment at 4.1%, while economic growth reached 2.6% year-on-year in the December quarter.

With oil prices above $100 per barrel and geopolitical tensions ongoing, the central bank signalled that inflation risks are now tilted to the upside, while also acknowledging significant uncertainty about the economic outlook.

By Tamilla Hasanova