RBA delivers split hike as inflation risks rise, with May tightening still in play.

This via a recap note from Westpac.

Summary:

• RBA hiked cash rate 25bp to 4.1% in a narrow 5–4 split decision

• Decision driven by capacity constraints and rising inflation expectations

• Middle East conflict and fuel price surge key inflation risk factors

• Labour market strength reinforces view economy remains “too tight”

• Board split reflects timing debate, not direction of policy

• Westpac retains May hike as base case, but uncertainty elevated

The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.1% at its March meeting, delivering a tighter policy stance in what proved to be a finely balanced 5–4 decision. While the outcome was widely anticipated, the narrow split highlights growing divergence within the Board around the timing of further tightening rather than the direction of policy itself.

According to Westpac, the decision was driven by two key factors: persistent domestic capacity pressures and a rise in inflation expectations linked to the Middle East conflict and the associated surge in fuel prices. The RBA continues to assess that the Australian economy is operating close to its limits, with demand growth outpacing supply capacity, reinforcing the risk that inflation remains above target for an extended period.

Recent data have strengthened this view. Labour market conditions have remained firm, prompting the Board to judge that capacity constraints may be slightly greater than previously thought. While some of the inflation surge in late 2025 was attributed to temporary factors, the RBA appears increasingly cautious about underlying momentum.

The Middle East conflict has added a new layer of complexity. Higher energy prices have already lifted near-term inflation expectations, challenging the traditional central bank approach of “looking through” temporary supply shocks. The RBA also flagged the risk that prolonged energy disruptions and uncertainty could weigh on supply capacity, further fuelling inflationary pressures.

However, the outlook remains highly uncertain. Westpac notes that the RBA has yet to formally model the economic impact of the conflict, leaving scope for its assessment to evolve. There are also broader risks to global growth if energy market disruptions intensify, particularly in scenarios involving prolonged constraints in key shipping routes such as the Strait of Hormuz.

Despite the split decision, all Board members agreed that further tightening may be required, with disagreement centred on timing. As long as the RBA maintains its view that the economy’s sustainable growth rate is around 2% and inflation remains above target, additional rate hikes will remain on the table. Westpac continues to expect a follow-up move in May, although the path ahead will depend heavily on incoming data and geopolitical developments.

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RBA next meeting is not until May: