The Middle East conflict has upended Australia's interest rate outlook. Three of the country's four major banks have reversed their forecasts in the past 24 hours, now predicting interest rate increases in both March and May as geopolitical tensions push oil prices higher and inflation concerns mount.
$181 a month. That is what an extra rate hike in March would cost a household with a $600,000 mortgage. If both March and May rate rises occur as the banks now expect, the total monthly impact reaches $181. For borrowers carrying a $1 million mortgage, the pain compounds to an extra $453 monthly.
National Australia Bank, Commonwealth Bank and Westpac all shifted their forecasts on Wednesday, joining UBS and Deutsche Bank in predicting a 25 basis point rise when the Reserve Bank Board meets on Tuesday 17 March. That would lift the official cash rate from 3.85 per cent to 4.1 per cent. The second hike, in May, would push it to 4.35 per cent. A third consecutive rate rise would follow the February hike that caught markets by surprise.
What changed? The answer lies in two charts: crude oil prices and geopolitical risk. Oil prices surged more than 25 per cent amid escalating Middle East tensions, triggering sharp reversals in rate expectations almost overnight. The cost of crude rose as high as US$118 a barrel in volatile trading before settling around US$90.
The banks' reasoning centres on inflation. Australia imports more than 90 per cent of the fuel it consumes, priced in US dollars. Higher oil translates quickly into higher petrol and diesel prices, which ripple through transport costs and into the prices of goods and services. The RBA already faces inflation at 3.7 per cent, well above its 2-3 per cent target band.
NAB stated the situation clearly: new upside pressure on inflation "tips the balance in favour of an additional increase". The bank said the economy's robust growth, a tight labour market, and elevated inflation "already supported further tightening" even before the oil shock.
The Case for Caution
Yet the picture is more complicated than simple rate increases. Westpac chief economist Luci Ellis acknowledged the legitimate arguments for holding steady in March. The oil shock is likely temporary; longer-term damage from the conflict to global growth remains uncertain. "There are good arguments for staying on hold until May given the temporary nature of the shock," Ellis said, adding that "a split vote at next week's meeting is possible".
The RBA's own Deputy Governor Andrew Hauser flagged the dilemma explicitly. Higher oil prices push inflation up and growth down simultaneously. Raising rates during a growth slowdown is the kind of policy squeeze central banks dread. Hauser said there would be "a very genuine debate" in the board room next week.
CBA head of Australian economics Belinda Allen captured the tension: "Conflicting pieces of evidence between offshore uncertainty and domestic pressures make the decision line ball." But the bank's revised view reflects where markets have already moved. With domestic data showing the economy running hot before the oil shock hit, the balance of probabilities has shifted.
The Squeeze on Households
For ordinary Australians, the timing compounds existing pain. Households are absorbing the end of electricity rebates, rising private health insurance premiums, and spiking petrol prices. Canstar data insights director Sally Tindall warned of a breaking point for some families if the predicted "one, two, three, punch" sequence of rate rises materialises.
Tindall offered practical advice: stress-test your mortgage repayments against rates half a percentage point higher. "For borrowers, the key message is to prepare for the possibility of higher rates, even if it's not yet a done deal," she said.
The RBA faces genuine complexity. Inflation risks demand action, yet growth and employment are the other pillars of its mandate. The geopolitical uncertainty is real and the outlook fluid. If oil prices retreat and tensions ease, the inflation shock may fade. If energy prices remain elevated, as they often do after major supply shocks, the central bank will have limited room to manoeuvre.
The RBA's latest monetary policy statement shows the board remains uncomfortable with inflation at current levels. The board will meet 16-17 March to make its decision. Until then, the uncertainty stands.