RBA rate-hike cycle could extend into 2027, analyst says

Binaya Dahal

Journalist

7 April 2026

The Reserve Bank of Australia (RBA) could be forced to extend its rate tightening cycle into 2027 as soaring energy prices linked to the Iran war threaten to keep inflation above target, according to Janus Henderson’s Fixed Interest Strategist, Emma Lawson.

With the conflict in the Middle East now entering its second month and early expectations of a swift resolution receding, she said the RBA must prepare for the lengthier impact of an energy shock.

“Petrol is up 50% from the start of the conflict, while diesel is up more. A literal translation of a 50% rise in fuel prices, over a quarter, will raise the CPI headline just shy of half a percentage point,” Lawson said.

“There isn’t always a literal translation, but the price impacts are very rapid, real and transparent. This alone is likely to see headline CPI reach 5% year on year though mid-year, double the RBA’s target level.”

She added the challenge for central bank is compounded by the structure of the economy with energy-intensive industries, such as mining, transport, manufacturing, agriculture and utilities, facing rising input costs that are difficult to offset.

“This should act as a brake on business and household demand due to rising costs. Given this, the expected economic growth profile moves lower over time, all else being equal, even with the net positive energy trade balance,” Lawson said.

“This can place near term pressure on the RBA, even with the two rate rises behind them. They need to trade off the near-term rapid rise in prices, against a slower acting but persistent reduction in domestic demand.”

Lawson cautioned that adopting the temporary measures such as fuel rationing could further intensify the pressure. “Fuel excise reductions may alleviate the price impact, but to-date, those adjustments do not override the full price change, and do not address the supply issue.”

She said the contraction in domestic demand will depend on the longevity of the current energy shock but noted that the RBA could consider cutting cash rates in the second half of next year.

“The event is still evolving, to-date we see the RBA raising interest rates further to address the inflationary aspect, which builds off an already high base,” Lawson said. “We currently see the RBA needing to lower interest rates through H2 2027 but will monitor for risks on both sides.”