War-driven uncertainty and rising fuel costs are feeding into a renewed inflation threat, as central banks confront the risk of slower growth alongside persistent price pressures.
The Reserve Bank of Australia has raised the cash rate by 25 basis points to 4.10 per cent, citing a pick-up in inflation and risks linked to the conflict in the Middle East.
The decision, taken by a narrow majority, reflects concern that inflation could remain above target for longer than expected. Five members voted to increase the rate, while four supported holding it at 3.85 per cent.
The Board said inflation had “fallen substantially since its peak in 2022” but noted it “picked up materially in the second half of 2025”. It added that “some of the increase in inflation reflects greater capacity pressures”.
Fuel prices have emerged as a key risk. The Board said “the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation”. It warned that short-term inflation expectations have already risen.
“As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated,” the statement said.
Domestic conditions remain mixed. The central bank said growth in private demand strengthened more than expected in late 2025, driven by stronger business investment, while consumption remained weaker. The labour market continues to show resilience, with unemployment “a little lower than expected” and underutilisation at low levels.
At the same time, housing activity and prices grew strongly over the past year, although price growth has moderated in early 2026.
Financial conditions have tightened, though the Bank said “the extent to which monetary policy is restrictive is uncertain”. Credit remains accessible and earlier rate reductions are yet to fully flow through to demand, prices and wages.
Global developments are shaping the outlook. The Board said the conflict in the Middle East “poses substantial risks in both directions”, with the potential to push energy prices higher and weigh on growth in Australia’s trading partners.
“A longer or more severe conflict could put further upward pressure on global energy prices; this will push up near-term inflation and could also increase inflation further out if it impairs supply capacity or price rises get built into longer term inflation expectations,” the statement said.
It warned that “higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia”.
The Board concluded that inflation risks have shifted higher. “Inflation is likely to remain above target for some time and the risks have tilted further to the upside, including to inflation expectations,” it said. “It was therefore appropriate to increase the cash rate target.”
Economist Stephen Koukoulas described the move as expected, noting the split decision. “Five to four sounds like good odds to me, but they hike rates, no surprises,” he said.
He questioned the central bank’s assessment of labour market strength, saying it comes “despite the fact that participation rates fallen, employment to population rates fallen, wages growth has moderated labour costs falling”. He added that the Bank “reckon a 4.1% unemployment rate is consistent with a tight labour market”.
Koukoulas said the Bank had pointed to tighter financial conditions, including higher exchange rates and bond yields, while acknowledging “material uncertainties about the global outlook”.
“They’re still saying that inflation will remain higher for longer and because of that that we need even tighter monetary policy,” he said.
The Reserve Bank said it would continue to monitor incoming data and global developments. “The Board will be attentive to the data and the evolving assessment of the outlook and risks to guide its decisions,” it said, adding that policy remains focused on price stability and full employment.
Markets are now watching whether further tightening will follow, as global energy shocks and domestic demand keep inflation under pressure.
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