Trump-fuelled oil shock forces RBA's hand, as rates rise again

The Reserve Bank of Australia (RBA) has again lifted interest rates, elevating the official cash rate on Tuesday (17 March) to 4.10 per cent.

Australian borrowers have become pawns in a geopolitical battle unfolding in the Middle East that is threatening to upend inflationary predictions.

National Australia Bank has forecast inflation will top 5 per cent in the next few months and even the nation’s Treasurer, Jim Chalmers, has admitted the consumer price index (CPI) will exceed 4.5 per cent because of the US-Israel war with Iran.

The CPI is currently at 3.8 per cent, and the trimmed mean inflation rate more carefully watched by the RBA has risen to 3.4 per cent, well above the central bank’s preferred 2.5 per cent target.

Economists say energy price shocks have historically been one of the fastest ways global conflicts translate into domestic inflation pressure.

Households already contending with a cost-of-living crisis could face further interest rate rises propelled by the soaring petrol and diesel costs fuelled by Donald Trump’s decision to attack Iran.

RBA Governor Michele Bullock acknowledged in the RBA’s Monetary Policy Decision that the latest Middle East conflagration is impacting borrowers.

“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,” the Board statement noted.

“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 (and) as a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.”

The RBA’s decision was a close call, with five members voting to increase the cash rate target by 25 basis points to 4.10 per cent and preferring to leave the cash rate target unchanged at 3.85 per cent.

The Big Four banks wasted no time passing on the rate hike in full to their variable borrowers. 

The CBA, NAB and ANZ variable mortgage increases will take effect on 27 March, while Westpac’s increase will be effective from 31 March. CBA, NAB and ANZ have not, at the time of publication, announced any increases to their savings accounts.

War, interest rates and what comes next

If the RBA does lift interest rates yet again on 5 May, many borrowers may feel they are paying the price for forces far beyond Australia’s shores.

The renewed surge in oil prices following escalating tensions in the Middle East has increased the risk that global inflation could reaccelerate just as central banks had hoped price pressures were easing.

Brent crude is (at time of publication) above US$102 a barrel, with some analysts warning that a prolonged disruption to supply could drive prices significantly higher.

For Australia, which imports most of its refined fuel, higher energy costs quickly filter through the economy. Transport, freight and electricity costs rise, lifting the price of goods and services even if domestic demand remains subdued.

That dynamic creates a difficult dilemma for policymakers.

Fuel isn’t optional – it’s fundamental – and when prices spike, costs rise immediately with very little room to hide.

- Gavan Ord, CPA Australia

The RBA’s primary mandate is to keep inflation within its target band, meaning it may have little choice but to tighten monetary policy if energy-driven price pressures begin feeding into broader inflation.

Yet for mortgage holders, the result can feel particularly frustrating. Households that have already endured one of the fastest rate tightening cycles in decades could face further increases not because Australians are spending too freely, but because global geopolitical shocks are pushing prices higher.

The chaos that is blocking 20 per cent of the world’s oil supplies passing through the Strait of Hormuz will also shake up the Federal Government, which is on the verge of delivering the 2025-26 Federal Budget.

The 25 March economic blueprint will focus on housing, including an expansion of the Help to Buy scheme, cost of living, healthcare and productivity reforms.

With panic buying doubling demand for fuel in just the past few days and dozens of petrol stations closing as they run out of stock, the implications for the economy are immense.

Borrowers, businesses and housing demand under pressure

Industry and business groups say the latest interest rate rise risks compounding financial pressure across households, small businesses and the housing market.

The Real Estate Institute of Queensland (REIQ) warned the decision to lift the cash rate to 4.1 per cent effectively punishes borrowers for price increases largely beyond their control.

Chief Executive Antonia Mercorella said two rate rises in as many months would place further strain on households already grappling with rising living costs.

“Many households are already feeling the squeeze from rising energy costs and other essentials, so the cumulative impact of back-to-back rate rises will stretch budgets even further,” she said.

Ms Mercorella noted that inflationary pressures were increasingly being driven by global factors such as higher fuel prices linked to escalating tensions in the Middle East.

“The RBA is responding to inflation caused by increases in prices relating to these global issues, such as higher prices at the petrol bowser, but the cash rate remains its only real lever to fight inflation,” she said.

“For a borrower with Queensland’s average new owner-occupier loan of around $690,000, today’s increase could add roughly another $105 to monthly repayments.”

The institute also warned that higher interest rates risk undermining the confidence and borrowing capacity of aspiring home buyers at a time when housing affordability is already under intense pressure.

Business groups say the economic ripple effects extend well beyond the housing market.

CPA Australia warned the latest rate increase would deepen the cost-of-living crisis while placing additional strain on fuel-reliant industries.

Business and investment lead Gavan Ord said sectors such as transport, trades, logistics and agriculture were already absorbing the impact of soaring fuel prices and rising borrowing costs.

“Fuel isn’t optional – it’s fundamental – and when prices spike, costs rise immediately with very little room to hide,” Mr Ord said.

“For many small businesses, fuel is now one of their largest and most volatile expenses. Combined with higher interest rates and persistent inflation, it’s making an already difficult situation worse.”

Mr Ord warned consumers should expect flow-on effects as businesses struggle to absorb rising operating costs.

“When costs rise this sharply and this quickly, prices at the checkout inevitably follow,” he said.

Cooling housing market

Housing analysts say the inflation picture is complicated by the type of price increases currently driving the consumer price index.

Gerard Burg, head of research at Cotality, said a significant share of recent inflation growth has been driven by administered and indexed prices, which tend to respond poorly to interest rate changes.

“To bring overall inflation back to target, the RBA needs to slow market prices to a much lower rate,” Mr Burg said, warning this increases the risk of a harder economic landing.

Higher borrowing costs are already cooling housing demand, although affordability constraints are concentrating activity at the lower end of the market.

Cotality’s national Home Value Index rose by 2.1 per cent in the three months to February, while properties in the lower value quartile recorded stronger growth of 3.2 per cent as buyers increasingly search for more affordable options.

Interbank futures markets have already priced in the possibility of at least one further rate increase this year, with many economists expecting another rise in May that would push the cash rate back towards 4.35 per cent.

Commercial property shows resilience

While higher interest rates are expected to weigh on sentiment across the broader economy, some analysts believe commercial property markets are better positioned to absorb the impact.

Ronak Bhimjiani, real estate economist at JLL, said the latest rate decision reflects central banks’ determination to contain inflation expectations following the surge in global oil prices.

However, he noted that much of the repricing caused by higher interest rates had already occurred during the 2022–24 tightening cycle.

“The yield recalibration during the 2022–24 tightening cycle means asset values have already largely adjusted to a higher interest rate environment; this isn’t a new shock to the system,” Mr Bhimjiani said.

In this environment, investors are increasingly prioritising income security, particularly assets with strong leases that include built-in rental growth mechanisms.

“With lease structures increasingly incorporating the greater of fixed annual increases or CPI, rental income has become a direct hedge against the very factor driving interest rate increases,” he said.

Knight Frank chief economist Ben Burston said higher borrowing costs and global uncertainty may weigh on commercial property sentiment in the short term, however, he said tightening supply pipelines across several commercial sectors could support rental growth and help underpin returns over the medium term.

“We are already seeing evidence of this in the office market where strong growth is now being recorded in Sydney, Brisbane and Adelaide, with other cities set to follow,” Mr Burston said.