As expected, the RBA increased rates to 4.1% in a lineball decision.
Between the SMP and press conference, the Board provided some good detail around the basis for their decision:
📍 The decision was not as close at the 5 to 4 vote would imply, with all board members agreeing on the direction of rates, and the dispute only being around the timing of the increase.
📍 Inflation picked up materially in the second half of 2025 and was already too high before the Middle East conflict. An increase now was prudent risk mitigation.
📍 Demand is outstripping supply, with GDP growth of 2.6% well above the RBA's 2% potential growth estimate.
📍 The labour market has tightened slightly over the last quarter, rather than stabilising as expected.
📍 The Middle East conflict has already driven fuel and energy prices sharply higher, adding further upside risk to inflation.
📍 There is a high risk of second-round effects if excess demand isn't curtailed — higher costs will get embedded into pricing.
The announcement and follow up comes across as a Board genuinely concerned about inflation getting away from them again. There was much criticism of the RBA for moving too slowly after COVID, and this board seems determined to sidestep that criticism this time around.
The focus now needs to be on the next move and while markets are locked in on anther hike in May, I am less certain. If energy prices remain elevated, which seems the most likely path, the RBA is going to find itself in a difficult position trying to balance rising prices against and economy that will start to show signs of real weakness.