Narrow RBA vote exposes rate uncertainty as oil shock fuels inflation risk

The latest interest rate hike from the Reserve Bank of Australia (RBA) was a close call, with the Middle East mayhem dividing the central bank’s board members.

The 5-4 vote in favour of lifting the official cash rate to 4.10 per cent was the closest decision since the RBA started publishing votes in July 2025.

The RBA Minutes released Tuesday (31 March) highlighted just how much confusion is swirling around the potential impact of a prolonged US-Israel war with Iran.

On the one hand, there is the inflationary impact of higher fuel prices that are already being keenly felt.

Counter to that is the potential for consumer demand to fall as the economy falters on the back of economic uncertainty, the logistics issues caused by fuel shortages and plunging consumer confidence. The ANZ-Roy Morgan consumer confidence index reached a new low in the week to March 29, down 4.3 points to 58.8.

The RBA Minutes detailed the thinking – and uncertainty - behind the rate rise they eventually implemented and the outlook for the upcoming 5 May decision and beyond.

“(Board members) agreed it was not possible to predict the future path for the cash rate target with any confidence, given the high degree of uncertainty around the breadth and duration of the current conflict in the Middle East.

“A longer conflict could have a material bearing on both inflation and economic activity (and) members therefore acknowledged that future policy decisions would require the Board to balance its two objectives carefully.”

Those objectives are to deliver price stability and full employment.

Borrowers hoping for a reprieve in May based on the close vote this time around may need to brace for disappointment.

Although there was a 5-4 split, all members saw further tightening as likely, with the disagreement only centred around timing.

The Middle East situation has left the policymakers needing to tread carefully, with the economic goals now finely balanced between inflation control and rising downside risks to growth.

“Members noted that while private demand growth had picked up as expected in the December quarter 2025, the outcome for consumption had been weaker than expected,” the minutes note.

“Taken together with the signal from indicators of household spending in the March quarter, the dampening effect of higher petrol prices on real household disposable income and subdued consumer confidence, there was a risk that consumption growth would be weaker than forecast in February.

“Given the possibility that this could lead to weaker GDP growth, there was a case to wait for a little more data to assess the degree of inflationary pressure coming from excess demand.”

The big four banks are in little doubt about where they see rates heading in 2026. They each forecast a May rise, with Westpac this week upping its forecast to predict the official cash rate will hit 4.85 per cent by the end of the year.

Middle East’s economic impact

Prime Minister Anthony Albanese knows Australians are feeling the heat from rapid fuel hikes, and on Monday (30 March) released a four-phase plan to tackle the crisis. This included halving the fuel excise, which will reduce the cost by 26.3 cents per litre.

Morgan Stanley has said Australia faces significant challenges, describing it as being at the front line of a global diesel supply shock, with critically low inventory cover into 2026.

The country’s biggest exporters are heavily reliant on diesel, which could be rationed if the war continues much longer.

Mining and agriculture are particularly sensitive to fuel supply shocks. Sustained shortages could disrupt port operations and create bottlenecks in key commodity flows such as iron ore and LNG, with major implications for the economy as a whole, and interest rates more specifically.

The RBA minutes may have expressed doubt around where the conflict was heading but left anxious borrowers in no doubt what the outcome would be if fuel prices continue to soar in the face of restricted supply from the Middle East.

“Higher petrol prices would flow through directly to headline inflation in Australia (and globally) in the near term,” the RBA Board noted.

“While a full update of the forecasts had not yet been prepared, the staff shared a simple estimate that the direct effect (via petrol prices) of oil prices remaining around US$100 per barrel would on its own lift headline inflation in Australia to around 5 per cent over the year to the June quarter, around three quarters of a percentage point higher than had been expected in February.

“Sustained higher oil prices would also boost inflation more broadly over time as input costs for firms rose and some of this effect was passed onto consumers.

“Members noted that, consistent with this analysis, short-term inflation expectations had increased further following the onset of the current conflict.”

Australian property prices have generally withstood major crises over the course of a half century.

But in the short-term, mortgagees would be wise to factor in a few possible rate rises when drawing up the next household budget.