The inflation storm is coming again! The Australian Reserve Bank narrowly passed consecutive interest rate hikes with a 5:4 vote result, weakening the hawkish tone.

The Reserve Bank of Australia raised its benchmark interest rate for the second consecutive meeting on Tuesday, increasing efforts to tackle stubborn inflation amid rising energy prices driven by the escalating Middle East conflict. The nine-member Policy Committee of the Reserve Bank of Australia voted 5-4 to raise the cash rate from 3.85% to 4.1%. This is the first consecutive rate hike since mid-2023 and reverses two of last year's three rate cuts. The yield on three-year government bonds fell by 8 basis points, while the Australian dollar edged lower, reflecting the close vote outcome. Meanwhile, traders increased bets on another rate hike in May to about a fifty-fifty chance. Michael Tang, interest rate strategist at the Commonwealth Bank of Australia, said, "The policy statement itself still retains a hawkish bias, but the 5-4 close voting outcome was seen as less hawkish." This "highlights the significance of the composition of the committee, and with the vote being so close this time, there is a risk they may not hike in May and a pushback on expectations of a May hike." This move follows earlier hawkish signals from Governor Blox and her deputy Andrew Hauser, who warned last Tuesday that the rise in prices due to the Middle East crisis was counterproductive to ongoing inflation suppression efforts. Philip McNicholas, Asian Sovereign strategist at ABN AMRO in Singapore, said, "I think this is quite hawkish and the split vote reflects the committee's debate of 'when' rather than 'whether' to hike rates. However, the market is taking the opposite view." The Reserve Bank of Australia's meeting is the first of eight major central bank meetings this week, coinciding with the escalation of the Middle East conflict. The Federal Reserve will announce its decision on Wednesday, and the Bank of Japan on Thursday. Attacks by the United States and Israel against Iran at the end of February, and Iran's retaliation against neighboring countries, has involved over a dozen countries in the conflict. The Strait of Hormuz is a crucial gateway connecting the Persian Gulf to the international market, carrying about 20% of global oil supplies. Its actual closure has led to soaring oil prices and poses a significant upward risk to global inflation. The Reserve Bank of Australia's board judged in its statement that there are "significant risks" that inflation will stay above its target range of 2%-3% for longer than previously expected. The board said, "The situation in the Middle East remains highly uncertain, but in multiple scenarios, global and domestic inflation could be exacerbated. Given these considerations, the board judges that inflation may remain above target for some time and risks are further skewed upward, including in inflation expectations." Some economists expect Australia's overall Consumer Price Index to reach 5%. Treasurer Jim Chalmers said last Sunday that households could face greater cost-of-living pressures and warned that the inflation rate could rise to over 4.5%. This is much higher than the Reserve Bank of Australia's February forecast that the CPI would peak at 4.2% this year. The forecast is based on a technical assumption that by mid-2028, oil prices will remain at $63.8 per barrel and the cash rate will be 4.2% in December 2026. As expectations of further consumer price increases emerge, the Reserve Bank of Australia finds itself unprepared for the resurgence of inflation in recent months dominated by services and housing costs, while the labor market remains tight. Therefore, most economists now expect another rate hike in May, raising the cash rate to 4.35%. This will completely reverse the 75 basis points of rate cuts implemented during a six-month easing cycle last year. Australian policymakers hope that the economy, operating close to full capacity and with historically low unemployment rates, can withstand tighter policy. The Reserve Bank of Australia's rate statement said, "Monetary policy is well positioned to respond to developments, with the board focused on its mission of achieving price stability and full employment and will take all necessary measures to achieve this goal." Data since the Reserve Bank of Australia's last meeting: A private sector consumer inflation expectations indicator for March rose to 5.2%, the highest level since July 2023. The annual GDP growth rate in the last quarter was 2.6%, exceeding the economic growth speed limit of 2% estimated by the Reserve Bank of Australia to trigger inflation. Capacity utilization remains high, indicating demand exceeds the economy's supply capacity. Meanwhile, the unemployment rate hovers at 4.1%, while job advertisements and other labor demand indicators have strengthened. Investors will watch the February employment report released on Thursday closely, followed by monthly inflation data next week. The Reserve Bank of Australia operates with a dual mandate, aiming for an inflation rate at the midpoint of its target range at 2.5% while striving to maintain maximum sustainable employment in the economy. In the United States, traders are betting that the Federal Reserve will cut rates further this year. This policy divergence has made the Australian dollar the best-performing currency among the ten major currencies so far in 2026.