The Reserve Bank of Australia faces one of its most difficult decisions in months when its board meets this week. The next cash rate announcement is due on Tuesday March 17 at 2.30pm. By then, markets will have had a week to test the central bank's resolve against the backdrop of an escalating conflict in the Middle East.
Until a fortnight ago, the consensus view was straightforward: the RBA would wait until May to raise rates again. Markets had largely assumed the central bank would hold off until the first-quarter CPI report on April 29 and potentially act at the May 5 meeting. That assumption has now been shattered. Commonwealth Bank now expects the RBA to lift the cash rate in March and again in May, taking it to 4.35%. This would be a significant repricing of policy expectations in just two weeks.
The calculus rests on inflation. Inflation remains above target and the labour market is still tight, keeping pressure on policymakers. The February rate rise took the cash rate to 3.85 per cent, and the RBA's messaging has grown sharper. Reserve Bank Governor Michele Bullock said an interest rate hike remains possible as early as this month if inflation expectations become unanchored, stressing that the board would not necessarily wait for the full first-quarter inflation data, due in late April, before making a decision.
But Iran has changed everything
What makes this week's decision genuinely uncertain is the Middle East. A prolonged conflict involving Iran could push global oil prices higher, increasing fuel, freight and food costs in Australia, and as a net oil importer, Australia pays global prices at the bowser, meaning supply disruptions in the Strait of Hormuz could quickly feed into inflation and household expenses.
The tensions cut both ways for the board. Higher oil prices would argue for tightening policy now, before inflation spirals further. But if the geopolitical shock is severe and sustained, additional rate rises could tip vulnerable borrowers into financial distress. Traders and economists widely expect the Reserve Bank to lift interest rates but uncertainty over the Iran war could convince the board to keep them on hold.
Treasurer Jim Chalmers has tried to calm the debate on recession fears. He doesn't expect the Australian economy to experience a recession as a result of the war in the Middle East, but said federal modelling shows inflation might peak in the high fours, and Treasury expected there to be a hit to growth, but not "the kind of dramatic contraction" of an economic crash.
The household squeeze continues
Wherever the board goes, Australian borrowers stand to lose. For an owner-occupier with a $600,000 debt and 25 years remaining, the RBA's 0.25 percentage point hike in February would likely have increased the average minimum monthly repayment by $90. If the RBA raises again in March and May, that monthly pressure doubles.
Some economists urge caution. National Australia Bank's February economic update suggests the likelihood of a further rise in March is low, with its economists signalling that policy may remain on hold in the near term while the RBA assesses recent data. This is the alternative case: that the board, having delivered its February hike, should pause to observe its effects before tightening further into an uncertain global environment.
The Reserve Bank deputy governor Andrew Hauser revealed in a recent podcast interview it is more worried about high inflation than growth, with market commentary suggesting this interview is guidance that a hike is more likely in March than not. Yet the geopolitical fog remains thick enough that the outcome remains genuinely uncertain.
The real question is not what the RBA should do on narrow economic principles. It is whether the board believes it has enough information to act, or whether Middle Eastern volatility creates sufficient doubt to warrant a pause. The situation could change entirely between the Reserve Bank board entering its lock-up on Monday morning and its cash rate announcement at 2.30pm on Tuesday. In that window lies the entire difference between two competing views of Australia's economic path.