Fin-X Rapid Response - March 17th

The Board of the Reserve Bank narrowly voted to raise the cash rate by a quarter point at a second consecutive meeting to 4.10% today.

• 5 Board members voted to increase the cash rate by +0.25% to 4.10% today, the second consecutive meeting with a rate rise. 4 Board members would have preferred to keep the cash rate on hold.

• The statement recalled that the economy is experiencing capacity pressures, low unemployment and stronger momentum in demand, adding that the events in the Middle East are adding to upward pressure on inflation and, importantly, inflation expectations:

  • "While inflation has fallen substantially since its peak in 2022, it picked up materially in the second half of 2025. Information since the February meeting suggests that some of the increase in inflation reflects greater capacity pressures. In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation. Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.

  • "Higher capacity pressures reflect, in part, the greater momentum in demand in the latter part of 2025. Growth in private demand strengthened substantially more than was expected in mid-2025, although the composition of that growth surprised in the December quarter. Business investment was above expectations and consumption was below expectations. Meanwhile, growth in unit labour costs declined. More recently, the unemployment rate has been a little lower than expected and measures of labour underutilisation remain at low rates. Activity and prices in the housing market grew strongly over the past year, although housing price growth moderated somewhat at the start of 2026.

  • "Financial conditions have tightened a little this year, but the extent to which monetary policy is restrictive is uncertain. Credit is readily available to both households and businesses and the effects of interest rate reductions in 2025 are yet to flow through fully to aggregate demand, prices and wages. The exchange rate, money market interest rates and government bond yields have risen over the past month. In large part, higher interest rates reflect expectations for the path of monetary policy, which have risen in Australia and most other advanced economies in response to the expected inflationary implications of the conflict in the Middle East."

  • "There are material uncertainties about the outlook for domestic economic activity and inflation and the extent to which monetary policy is restrictive. Globally, the conflict in the Middle East poses substantial risks in both directions. A longer or more severe conflict could put further upward pressure on global energy prices; this will push up near-term inflation and could also increase inflation further out if it impairs supply capacity or price rises get built into longer term inflation expectations. Higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia."

• The language used in the statement suggests that the RBA is worried about what might result in the future, rather than responding to today's data. The governor added at the press conference that the oil price increase will raise inflation, but the Board is more concerned about second order effects, i.e. changes in inflation expectations.

• However, surprisingly, the governor said that the cash rate would have needed to rise, even in the absence of the energy price increase. She added that the rise in fuel prices was not enough on its own to slow demand sufficiently to bring down future inflation.

• The governor said of the meeting, "We had a very robust conversation over the past two days". But the disagreements related purely to the timing of the rate increase. Everyone agreed that rates needed to go up, but some preferred to be patient to see how events in the Middle East evolved.

• The impact of a sustained fuel price rise was not modelled for the meeting.

• S&P/ASX200 8,618 +0.4%, AUDUSD 0.7075 (unch), Aus 2yr 4.52% -5bps, Aus 10yr 4.92% -8bps

Fin-X Wealth View

• The cash rate is now at the highest level since May last year. It is also and 0.25% below the high of the post-pandemic hiking cycle.

• We sympathise with the view that the Board could have taken more time to "wait and see", especially as the impacts of higher fuel prices for an extended period were surprisingly not modelled.

• Lower growth and higher unemployment were outlined as the consequence of the February rate rise in the accompanying quarterly forecasts, even before the rise in energy prices. It seems likely that the next estimates in May will show rising unemployment and lower growth unless the reduction in oil supply is resolved quickly. There are already signs of deterioration in business and consumer confidence. Even though it's difficult to know how restrictive financial conditions are, many households and businesses were expecting a gradual easing cycle heading into the end of 2025. The surprise of two consecutive rate rises risks amplifying the energy price shock.

• Market pricing of future rates has changed little, with the cash rate still expected to peak around 4.5% later this year. Employment data is due out on Thursday morning.

  

  
  

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