Australia's Central Bank Raises Rates to Near One-Year High Amid Middle East Conflict! Another Hike Possible in May

The Reserve Bank of Australia (RBA) on the 17th, as expected by the market, raised its benchmark interest rate for the second consecutive time, increasing it by 25 basis points to 4.1%, the highest level since April 2025.

In February, due to concerns about persistent inflation, the RBA became the first developed economy central bank this year to tighten monetary policy. Subsequently, escalating Middle East conflicts heightened inflation worries. However, this rate hike decision was passed by a narrow majority, with five votes in favor and four against.

The main reason for this rate increase is that Australia’s inflation rate has remained above the RBA’s 3% upper limit, and the conflict in the Middle East could lead to further price rises. The Reserve Bank of Australia stated in its announcement: “Although inflation has significantly declined from its peak in 2022, it has shown a notable rebound in the second half of 2025.” The bank added that, despite high uncertainty surrounding the Middle East situation, it could intensify global and domestic inflation, and Australia’s inflation may remain above the target level “for some time,” with risks tilted further upward, making a rate hike necessary.

The statement also emphasized, “Australia’s monetary policy is well-positioned to respond to various developments, and the Monetary Policy Committee remains focused on achieving the dual mandate of price stability and maximum employment, taking all necessary measures to do so.”

In the fourth quarter of last year, Australia’s inflation rate was 3.6%. On a monthly basis, January’s inflation rate was 3.8%, slightly above the previous forecast of 3.7%. Meanwhile, the Australian economy remains strong, with GDP growth reaching 2.6% in the fourth quarter of last year, exceeding expectations, which gives the RBA room to maintain relatively high interest rates.

The current stance of the RBA aligns with concerns expressed last week by Deputy Governor Andrew Hauser in a media interview. He warned that inflation remains a problem, with inflation levels too high, and expected to rise back to the 2%–3% target range by the end of 2026 or 2027, reaching the midpoint of that range by 2028.

In February, the RBA forecasted that overall inflation would peak at around 4.2% in mid-2026 and then fall back to “just below 3%” by mid-2027. However, Hauser stated last week that these forecasts might be revised upward, as the Middle East conflict had not yet erupted or escalated at that time.

Following the rate hike announcement, the Australian S&P/ASX 200 index rose by 0.11%, the yield on three-year government bonds fell by 8 basis points, and the Australian dollar edged lower.

Meanwhile, the market’s expectation of a further rate hike by the RBA in May, raising the cash rate to 4.35%, increased to about 50%. If this occurs, it would fully offset the 75 basis points of rate cuts implemented during the six-month easing cycle last year.

Michael Tang, a rate strategist at Commonwealth Bank of Australia, said, “While the statement still leans hawkish, the narrow 5-4 vote is seen as a sign of slightly reduced hawkishness. This also reflects the importance of the composition of the Monetary Policy Committee. Given the close voting, there remains a risk that there will be no rate hike in May.”

This week, 21 central banks covering two-thirds of the global economy will announce their latest interest rate decisions. As this is the first “super week” of central bank meetings following the outbreak of the Middle East conflict, markets are closely watching whether and how these decisions will be influenced by developments in the Middle East. The RBA’s rate decision is the first among the eight major central banks’ meetings this week.

The Federal Reserve will announce its decision on the 18th local time, followed by the European Central Bank, Bank of England, and Bank of Japan on the 19th. Markets are widely focused on whether and how these central banks will address the impact of the Middle East conflict on inflation, economic growth expectations, and monetary policy outlooks.

(Article source: Yicai)