Rising fuel costs a wholly unwelcome spanner in the works for Monetary Policy Board
In the space of mere weeks, the idea of the Reserve Bank of Australia (RBA) going all in on rate rises has gone from a 50/50 bet to a near certainty.
No prizes for guessing why – a quick visit to your local Shell will spell it out in blazing green lights.
As Iran’s shutdown of the Strait of Hormuz – a conduit for a fifth of global oil supply – continues following joint US-Israel attacks on the country, oil prices have skyrocketed.
It was the last thing Australians needed. Inflation was already on the rise, having spiked from 3.4% on an annualised basis in November 2025 to 3.8% as of this January.
True, automotive fuel only contributes around 3.3% to 3.5% of the Consumer Price Index (CPI) basket, but it’s just another inflationary expense to heap onto the pile for Australian consumers.
Add in super tight labour conditions, and it’s no wonder the market is currently pricing in a more than 70% probability of the RBA jacking the cash rate up to 4.1% this afternoon.
Depending on how long the Middle East conflict rages for – and how long domestic labour and pricing conditions maintain their current trajectory – there could be even more to come down the line.
That’s already the view of the Big Four banks – Commonwealth Bank, ANZ, NAB and Westpac – all of which expect the cash rate to move to 4.35% come May.
While today’s meeting “will be a close one”, according to Belinda Allen, head of Australian economics at Commonwealth Bank, “with inflation still above target and the economy running above trend, we expect the Board will choose to lift rates again and follow up with another move in May”. Her comments summarise the general vibe among the major banks’ economists.
Broker association the Finance Brokers Association of Australia (FBAA) is pleading with the RBA for restraint, warning that “Australians are yet to experience the cost of living increases that are predicted to hit soon due to the Middle East conflict”.
But the Board boffins have clearly stated their data-led approach, and will be basing today’s decision purely on a cost-benefit analysis.
If they do indeed lift rates to 4.1%, they will have determined that a higher cost of capital is necessary to cool off the economy, even if it creates further mortgage stress for existing homeowners.
Will Fed defy Trump?
Meanwhile in the US, the Federal Reserve is set to make its latest interest rate call on Wednesday.
The Fed isn’t just battling its mandate of keeping inflation in check; it’s battling political pressure from US president Donald Trump, who has used every ounce of his political muscle to force the supposedly independent central bank to cut rates.
While the Fed has obliged with three rate cuts since last September, it is widely tipped to hold fire on interest rates despite rising geopolitical risks and a softer US jobs backdrop.
“Policymakers appear poised to leave rates unchanged again this month,” Senior First American economist Sam Williamson told Mortgage Professional America, noting inflation remains above target while the labour market is “softer, but not weak enough to force immediate action”.
Geopolitical shocks via energy prices “add another layer of uncertainty, but not yet enough to alter the policy picture”, he added, pointing to a continued “wait-and-see” stance until inflation is clearly on a sustainable downtrend.
Don’t expect Trump to take an interest rate hold lightly. His pressure campaign against Fed chair Jerome Powell took a beating last week after a criminal investigation into Powell was blocked.
US District Judge James Boasberg suggested the investigation – supposedly relating to cost overruns for renovations to the Fed's headquarters – was part of a pressure campaign to force the Fed into slashing interest rates.
"The Government has offered no evidence whatsoever that Powell committed any crime other than displeasing the President," the judge said.
