Concerns over geopolitical tensions the RBA’s ‘last straw’

Yasmine Raso

Senior Journalist, Financial Newswire

18 March 2026

Fuel and energy price shocks driven by escalated tensions in the Middle East have been described as the “last straw” that pushed the Reserve Bank of Australia (RBA) to hike the official cash rate by 25 basis points by new market commentary.

With Australians and markets now grappling with a second consecutive hike to 4.1 per cent, MLC Senior Economist, Bob Cunneen, said the inflation data estimates for the coming months corroborates the central bank’s Board’s concerns that there “is a material risk that inflation will remain above target for longer than previously anticipated”.

“The primary catalyst for this decision was concern that Australia’s annual inflation is heading higher coming months. The sharp surge in petrol prices in the aftermath of the Middle East War proved to be the final straw that pushed the central bank to tighten monetary policy,” he said.

“A ‘back of the envelope’ calculation suggests that Australia’s inflation will rise by a further 1.1 % in coming months given national petrol prices have surged from $ 1.71 in February to above $ 2.25 currently. Accordingly, Australia’s inflation annual appeared destined to head towards 5% by mid-2026.

“Australia’s Consumer Price Index (CPI) showed headline inflation was already at 3.8% in the year to January. Given the RBA’s February forecast had Australia’s inflation climbing further to 4.2% by June 2026, the recent surge in petrol prices essentially boxed the central bank into the corner.

“For the RBA, the concerns that the Australian economy is currently stretched with high-capacity utilisation, stronger private demand and low unemployment remain intact.

“However, this was a ‘split decision’ by the RBA Board with 5 members voting for an 0.25% interest rate rise while 4 members voted to keep interest rates on hold in March. This split casts some doubt that the RBA will follow through with another interest rate rise soon. The RBA Board acknowledged that there were “material uncertainties” on Australia’s outlook, whether monetary policy is restrictive and the path of the Middle East conflict.

“Future inflation results will be the determining factor in whether the RBA again raises interest rates. The next important signpost will be February release of the Monthly Consumer Price Index (CPI) on March 25th and then the more detailed March quarter CPI on April 29th.”

VanEck’s Head of Investments & Capital Markets, Russel Chesler, said markets may be buying into concerns that the impact of current economic shocks will be longlasting too heavily and are “getting ahead of themselves” when it comes to pricing in the remaining interest rate decisions for the year.

“While today’s hike was widely expected, markets are already building in as many as two additional increases this year, potentially taking the cash rate to around 4.6%. In our view, that outlook assumes oil prices remain structurally higher for an extended period, which may not materialise,” he said.

“Oil shocks linked to geopolitical events typically prove temporary and often have the opposite effect on inflation caused by reduced commercial activity. Australian consumers are already feeling the impact at the petrol pump, and sentiment has deteriorated sharply. The latest ANZ–Roy Morgan Consumer Confidence reading fell 4.9 points to 68.5 this week, the lowest level since the early days of the COVID pandemic.

“In that environment, the risk is not runaway inflation but a slowdown in demand. We think that ultimately limits how far the RBA can push rates higher this cycle.

“This backdrop could favour segments of the market that benefit from higher commodity prices and structural demand. Mid-cap resource companies are particularly well-positioned, especially those exposed to critical minerals tied to the global energy transition. Historically, the materials sector has also performed well during previous hiking cycles, including pre-GFC, 2010 and 2022.

“We also favour companies with strong pricing power that can pass higher input costs through to consumers while protecting margins. Australian infrastructure and telecommunications names such as Telstra and Transurban are potential stand-outs.”

A similar sentiment was echoed by Brendan Mutton, Head of Sales at trading platform Selfwealth by Syfe, who said the firm is currently expecting only one more hike this year.

“The RBA’s decision to lift the cash rate again reflects growing concern that inflation pressures in Australia remain persistent. The economy as a whole is still running above its ‘speed limit’, with strong investment and a tight labour market continuing to fuel price pressures. The fact that the RBA is considering potential spillover from the oil shocks shows that they’re keen to get ahead of the curve,” he said.

“For investors, the key takeaway is to remain focused on long-term strategy rather than reacting to short-term rate moves. Markets have historically rewarded those who stay invested through cycles. In the current environment, diversification remains critical, with resilient equities, select commodities and a balanced allocation to bonds and cash playing an important role in portfolios as the RBA continues its fight against inflation.”

Gavan Ord, Business and Investment Lead at CPA Australia, said today’s interest rate rise will worsen the cost-of-living crisis and put more pressure on many small businesses, especially those heavily reliant on fuel.

“These businesses are feeling bruised by higher fuel costs that are flowing through every part of their operations. Fuel isn’t optional – it’s fundamental – and when prices spike, costs rise immediately with very little room to hide.

“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. Every trip, delivery and service call now costs more.Businesses can’t absorb these increases indefinitely, and many are running out of options.

“Households are pulling back, businesses are losing confidence, and yet costs keep rising,” he said. “This rate increase adds fresh pressure just as many were hoping for some relief. Borrowers who might have believed last month’s rate rise was a one off will be deeply disappointed – at the same time as fuel, food and energy bills continue to climb.

“Short-term relief won’t fix a system where small businesses are burdened by high costs, excessive red tape and uncertainty. What is needed is decisive action to cut unnecessary regulation, lift productivity and restore confidence.”