Written 25th March 2026
At their March 17th meeting and in a 5/4 split decision, the RBA board voted to increase the cash rate to 4.10%, an increase of 0.25%. The decision was largely based on “robust” inflation numbers from Q4 2025 and a tightening in the labour market. As managing inflation within agreed bands and the labour market are the focus of the RBA it does seem logical we got a rate rise but there has been some debate on the timing, including internally in the RBA with the split decision. The governor of the RBA confirmed in the following press conference that some board members were asking for more time to see more data to confirm the direction of inflation and the labour market, especially after the rate rise in February.
There was also mention of the effect of volatile energy costs because of the conflict in the Middle East that could pose substantial risks. There is a direct short-term inflationary impact of higher fuel costs both at the pump for consumers and in higher costs for goods that require transport. This can be short lived but can also leave lasting effects on the price of goods that don’t retrace the fuel driven price rise.
Whilst the RBA was non-committal on further rate hikes, the market is pricing in more rate hikes this year, starting with another 0.25% in May, with at least another 0.25% to follow within the next 6 months.
The next RBA Board announcement will be on the 5th May.
Summary of key data – Businesses are confident, but consumers are hurting.
| Indicator | Recent Period | Previous Period | Reporting Periods | Comments |
|---|---|---|---|---|
| Real GDP Growth | +0.8% | +0.5% | Dec and Sept Quarters | Lifting |
| Headline CPI (annualised) | +3.8% | +3.8% | Jan26 and Dec25 | Well above target range |
| Core (trimmed) CPI (annualised) | +3.4% | +3.3% | Jan26 and Dec25 | Above target range |
| Unemployment Rate | 4.3% | 4.1% | Feb26 and Jan26 | Increasing but still tight |
| Underemployment Rate | 5.9% | 5.7% | Jan26 and Dec25 Months | Slightly looser |
| Wage Growth | 0.8% | 0.8% | Dec and Sept Quarters | Stable |
| Household Spending | +0.3% | +0.5% | Dec and Sept Quarters | Decreasing Again |
| Consumer Confidence (Westpac-MI Index) | 91.6 | 90.5 | Mar26 and Feb26 months | Deeply pessimistic |
| Business Spending | +0.4% | 6.4% | Dec and Sept Quarters | Reversion to more normal levels |
| Business Confidence (NAB survey) | -1 | +3 | Feb26 and Jan26 Months | Big drop possibly conflict related |
Inflation as measured by the CPI maintained its level of 3.8% from Dec 25 to Jan 26 with underlying CPI up to 3.4% from December’s 3.3%. Both inflation rates are well above the RBA’s target range of 2-3% and trending up. This is a concern for the RBA; hence they have moved from a cycle of cutting rates to increasing rates.
Despite a very slight uptick in unemployment, the labour market remains tight, the economy continues to grow steadily, and business confidence is OK but currently affected by the conflict in the Middle East. The concern is that increasing rates will have a greater impact on mortgage holders, of which approximately 25% were already struggling with mortgage stress due to a continued drop in real wages (inflation is greater than wage growth). This has led to a sharp decrease in household consumption and consumer confidence from a year ago.
Household and business confidence is a bit tricky to read now due to the impact of the conflict in the Middle East. For households, the underlying issues of mortgage stress persist among a percentage with large home loans. Business confidence as measured by the NAB survey was a big change to the negative reflecting the impact of the February rate hike, expectations of future rate hikes, tightness in the labour market and the beginning of unease with the Middle East conflict just beginning at the time of the survey.
Energy and energy price volatility
The traditional drivers of inflation from a growing economy are things like higher wages from tighter labour markets and higher raw material costs from increased demand, leading to higher prices for goods and services. Controlling these inflationary factors is “simply” a matter of the RBA raising interest rates, making money more expensive, which then slows demand and in turn the economy. This formula works as wages and business profitability are rising, people have the capacity to spend more, and businesses feel confident to invest, but when money becomes more expensive both consumers and businesses slowdown, which then slows the economy.
Then we have events like the current conflict that, through a supply shock, cause a significant rise in the cost of only one input to the economy being energy. This then causes inflation through increased costs for goods and services, but as the inflation was not caused by traditional means, rising interest rates don’t really work to slow this inflation. This is because the inflation wasn’t a result of people and businesses having too much money to spend, so making money more expensive doesn’t address the problem, it only further constrains people and businesses.
There is, however, a school of thought that is shared by the RBA to some extent that rising energy costs tend to take care of themselves as they reduce consumption and business confidence reducing economic growth therefore lowering inflation. In the current situation, we will have to wait and see how this plays out. Whilst a short-term rise and retreat in energy prices could just wash through the economy, the longer the inflation prices persist, the more it affects prices of goods and services and often these price rises don’t retreat once things return to normal. This was noted by the RBA as an inflationary issue it is monitoring.
