The RBA raised the cash rate for a second straight meeting, lifting it by a quarter of a percentage point to 4.10%. It has acted to head off rising inflation and growing inflation expectations, a toxic combination that risks keeping inflation higher and harder to dislodge. Think of a toddler making a mess with toothpaste. Once it has been squeezed out of the tube, it becomes a tough task to put back.
Indeed, the RBA has pointed to a “material risk that inflation will remain above target for longer than previously expected.” Even abstracting from the war in the Middle East, inflation was already “too high”. Even so, the board decision was finely balanced with a narrow 5–4 split in favour of acting now. The Governor said this split reflected differences over timing, not direction. The spike in energy prices from the war in the Middle East no doubt strengthened the case for earlier action.
Our forecasts include another rate hike in May. But borrowers, especially households with variable rate mortgages, are now possibly in a more precarious position. Additional hikes, rather than one more hike, remains possible. Much will depend on how long the conflict in the Middle East persists. Oil prices could rise a lot further depending on how the conflict evolves. The RBA has not yet modelled second-round effects of further oil price rises. Only first-round effects have been considered – and not fully.
The press conference touched on recession risks. The longer the war lasts, the greater the risk that higher energy and fertiliser prices also bring weaker economic growth, globally and domestically. The Governor noted the Board is monitoring conditions closely and is prepared to “change tack” if needed. There, however, is also the possibility of stagflation. What does that mean? It describes a period in which inflation remains elevated even as growth slows and unemployment rises from higher interest rates and higher energy prices. Higher petrol prices act like a tax on spending by society, but a supply shock of this nature can keep inflation high while growth weakens, potentially leaving rates higher for longer.
The RBA Governor in the press conference also cautioned that a prolonged conflict could lift longer term inflation expectations and cause inflation to rise further. Indeed, the International Energy Agency (IEA) recently described the current hit to oil production as the “largest supply disruption in history”.
The Strait of Hormuz’s closure poses a significant challenge because 20% of global crude oil and natural gas pass through this route, and only a limited amount can be rerouted elsewhere. Further, operations at Middle Eastern refineries and facilities have been disrupted and may take weeks, months, or even longer to fully recover. As much as a third of the world’s global fertiliser trade also moves through this strait and that has implications for agricultural output and food prices.
The Reuters poll taken last week showed 23 of 30 economists expected a hike today (including William Buck) and the median among economists by the end of this year is 4.35%. Meanwhile, the swap market is fully priced for two more rate hikes this year, occurring in May and September 2026. That would see the cash rate end this year at 4.60%, higher than the previous peak.
Looking ahead, global developments could continue to play a growing role in determining where the cash rate ends in 2026, especially with inflation above target and upside risks. Four current risks stand out.
4 key global risks
Middle-East conflict:
Unless the conflict ends soon, the RBA will find it increasingly difficult to look through its supply-side effects, even if they ultimately prove temporary. Some refineries and facilities may take time to recover, but much hinges on the reopening of the Strait of Hormuz, given how sensitive global prices are to the volume of production that moves through it. Markets would also need confidence that any ceasefire is durable, rather than a pause before further escalation.
Against this backdrop, the RBA will be focused on keeping inflation expectations well anchored, so that higher headline inflation stemming from the Middle East conflict does not become embedded in underlying inflation. This risk helps explain why further tightening remains a live possibility, and why more than one additional rate rise cannot be ruled out.
Global conditions had already become more fragile, even as incoming data continued to show surprising resilience. The world economy is now facing several overlapping challenges. The most immediate is the supply shock arising from the conflict involving Iran. While energy is the primary transmission channel, the risks extend well beyond oil markets. Disruptions to shipping through the Strait of Hormuz threaten supplies of a wide range of chemicals and fertilisers.
This shock is hitting at a time when Australian headline inflation was already elevated, at 3.8% over the year to January. Inflation is likely to move above 4% in February and rise further in March. Petrol prices have already surged, up 36%, at the terminal gate in the two weeks from 27 February to 16 March. Some service stations are already reporting shortages, as panic buying also increases.
Artificial intelligence (AI)
Second, late last year investors began to reassess the scale of AI related investment and whether it was being justified by returns. This prompted greater caution around the elevated valuations of many large technology and AI exposed companies. That reassessment and rotation is still unfolding and the disruptive effects of AI are becoming more visible, including in Australia. Just last week, Atlassian announced layoffs of 10% of its workforce, underscoring how these pressures are now flowing through to employment outcomes.
The market reassessment of AI led technology valuations began in late August 2025, crystallising around 21 August when research from Massachusetts Institute of Technology (MIT) suggested that widespread AI investment was delivering far weaker than expected returns. The focus of investors subsequently shifted from ‘AI potential’ to ‘AI payoff’. Even so, the US technology bellwether, the Nasdaq, closed 6.5% higher on 16 March from its close on 21 August 2025.
Private-credit market
Third, risks in private credit markets have attracted increased attention. After a period of rapid growth over the past decade, the sector has come under closer scrutiny. Recent developments have added to these concerns. It includes a large BlackRock private–credit fund limiting investor withdrawals following a surge in redemption requests. It highlighted the challenges that can arise when investors seek access to funds invested in assets that are difficult to sell quickly. They have also brought renewed focus to valuation practices, the speed with which stress is reflected in reported performance and the growing links between private credit managers and the banks that provide financing. While the sector remains smaller than traditional banking and public credit markets, its evolution and interconnectedness warrant close monitoring.
Tariffs
Fourth, the global trading system shifted materially in April last year when US President Trump introduced a new US policy of tariffs. In doing so, the legal frameworks and rules governing global trade were fundamentally altered. The tariffs themselves, along with ongoing policy announcements and accompanying threats, have added to already elevated levels of global uncertainty.
All four of these developments are occurring simultaneously and whether the global economy can sustain resilience to these unfolding factors remains to be seen.
