RBA delivers third rate hike to combat oil-fuelled inflation

The Middle East conflict keeps oil prices high

The US-Iran conflict remains unresolved, as the two sides have been unable to reach an agreement despite diplomatic efforts. The Strait of Hormuz stays under a dual blockade with little hope of reopening, and tensions rising as the United Arab Emirates said it came under fresh attacks on Monday. ^[1]

The US is implementing "Project Freedom" to guide ships out of this crucial waterway, with CENTCOM reporting that two US-flagged commercial ships have transited through ^[2]. However, Tehran responded by imposing a new maritime control zone. There has also been a flurry of attacks on ships in the region in recent days according to UKMTO ^[3], intensifying security concerns. President Trump said the US struck multiple Iranian small boats ^[4], while Tehran claimed it had attacked US Navy ships. ^[5]

The situation remains highly volatile, keeping oil prices elevated. Even if the Strait reopens, it would take time for flows to normalise. Exxon Mobil's CEO expects this to require one to two months based on his Q1 earnings call comments ^[6], while Chevron CEO Wirth told Bloomberg on Monday that he remains "concerned about the security of transit". ^[7]

RBA hikes again but the runway gets shorter

The spike in energy prices is fuelling rising price pressures and inflation expectations globally, including in Australia. CPI rose 4.1% y/y in Q1, the fastest pace in over two years, while consumer expectations jumped to 5.9%, the highest level in nearly four years.

Reacting to the inflationary impulse, the Reserve Bank of Australia delivered its third straight rate hike today ^[8], cementing its status as a frontrunner in monetary tightening. After the 25 basis point move, interest rates now stand at 4.35%, the highest since late 2024. Policymakers acknowledged that the Middle East conflict has pushed fuel prices "sharply" higher, noting this is "already adding" to inflation, which is expected to remain above the 2-3% target "for some time". The conflict is also driving a rise in expectations and creating wage-price spiral risks.

The central bank refrained from offering guidance on its next step, but the Monetary Policy Report assumes the cash rate will peak at 4.7% by year end ^[9], leaving room for at least one more hike. Governor Bullock also said during her press conference that officials are not in a wait-and-see mode. ^[10]

However, the RBA's tightening runway is getting shorter and Governor Bullock said officials are in a position to be alert to risks on both sides. This echoed the policy statement, which noted the Board is "well placed" to respond to developments. Importantly, the decision was not unanimous, with one member voting in favour of a hold, suggesting additional hikes will not come as easily.

Policymakers will have good reason to proceed carefully following the rapid pace of tightening, as the Middle East conflict can hurt the economy. Australia may be a major energy exporter but still relies on refined oil imports ^[11], leaving it vulnerable to supply disruptions. Officials noted that higher prices and uncertainty "may cause growth to be lower". Even though the economy and labour market have so far remained resilient, the risks are growing. In an early sign of the potential impact, consumer confidence recorded its biggest drop since the onset of the pandemic according to Westpac. ^[12]

AUD/USD outlook

The RBA's lead in monetary tightening can continue to support AUD/USD and extend this year's rally. Above the EMA200 the bullish bias remains intact, with the road to new multi-year highs open (0.7283).

However, AUD/USD drops today after the decision, as the hike was largely priced in and officials have limited room for additional increases from here. At the same time, markets are pricing out any Fed cuts this year and lingering geopolitical uncertainty continues to support the USDOLLAR. As a result, the pair is exposed to a move below the EMA200 that would shift the immediate bias to the downside and open the door to deeper pullbacks.