The RBA hiked the cash rate by 25bps to 4.10% at today's meeting. This is now back-to-back hikes, reversing two of the three cuts from 2025. The decision was widely anticipated (but against my contrarian view for a hawkish hold) - though it was much closer than markets and forecasters had expected, voted through on the narrowest possible majority (5-4). Governor Bullock said at the press conference that both voting blocs were in alignment over the need for a rate hike, the only distinction was in the timing. In the end, Governor Bullock said the majority gave the nod to today's hike due to higher petrol prices from the Middle East conflict adding to an already elevated inflation outlook, while recent data had indicated increased capacity pressures in the domestic economy.
A hike at today's meeting was a decent chance ever since the February meeting when the RBA raised its inflation outlook, pushing back the timing of hitting the midpoint of the 2-3% target band until 2028. But a March hike remained an underpriced risk for a long time, with markets only latching onto expecting a hike last week - and from what Governor Bullock said was a misinterpreted signal in any case referring to Deputy Governor Hauser's podcast appearance.
Higher petrol prices will put upward pressure on inflation, and Governor Bullock said the RBA needed to cool demand to ensure there is limited pass-through of this into prices more broadly - especially with the recent data showing economic growth and the labour market were even stronger than it had assessed. A lift in some measures of inflation expectations have also caught the Board's attention. These were the key factors for the majority supporting a hike.
The case pushed by the minority on the Monetary Policy Board today (and the view I sided with) was that given the uncertainty around global growth and inflation due to the Middle East conflict, waiting was the prudent course, described by Governor Bullock as a hawkish hold. Caution amid this uncertainty will likely be one of the key themes to emerge from the plethora of other major central bank meetings (Fed, ECB, BoE, SNB, BoJ, BoC and Riksbank) later this week, making the RBA an outlier in hiking today.
But for the RBA, if it didn't hike today, it was very likely to hike in May. It could still go onto hike in May; however, such market calls for a meeting 7 weeks away (May 4-5) are tenuous at best given today's split vote and not knowing how events in the Middle East will unfold or how the data domestically will come in.
