Key points
- In a close decision (5 votes to 4), the RBA Monetary Policy Board decided to lift the cash rate by 25bp to 4.10%.
- The main driver of the decision was a judgement that there is a material risk that inflation remains above target for even longer than previously anticipated.
- A tighter labour market, upside risks to inflation expectations, and greater capacity pressures were also motivations for the decision to tighten monetary policy.
- NAB continues to expect a further interest rate rise in May.
Bottom Line
In a closer decision than perhaps most expected, the RBA Monetary Policy Board decided to increase the cash rate by 25bp to 4.10%. Greater capacity pressures, upside risk to inflation expectations, a tightening in the labour market and upside risks to inflation expectations are all cited as reasons for the increase. Interestingly, while the Statement acknowledges that the conflict in the Middle East poses “…substantial risks in both directions”, it also observes that the conflict could add to global and domestic inflation under “…a wide range of scenarios.” The most important take away from today’s Statement is the observation that “…there is a material risk that inflation will remain above target for longer than previously anticipated.”
Detail
On the basis of recent inflation, labour market, and GDP data which have all been stronger than expected, the RBA went into the March Monetary Policy Board meeting with little or no tolerance for higher inflation, and likely relatively more tolerance for some slowing in growth.
The potent combination of upside risk to inflation expectations, a longer period of above target inflation, a tighter labour market and greater capacity pressures ultimately meant that a majority of Board members viewed a 25bp increase in the policy rate as the appropriate decision and the dominant issues for monetary policy as very much domestic in their genesis. Indeed, the Statement also notes that there are a wide range of scenarios in which the Middle East conflict adds to both global and domestic inflation.
The decision was not unanimous (5 votes for a 25bp increase, 4 votes for an unchanged cash rate). Heightened uncertainty arising from the Middle East conflict and some nuances to domestic dynamics likely played a role in the vote split. The Statement also acknowledged that the 4Q GDP data delivered a few surprises; growth in unit labour costs slowed and the composition of private demand surprised (stronger investment, weaker consumption). Some moderation in house price growth was also noted, as was a modest tightening in financial conditions.
In the press conference, the Governor gave more colour to voting dynamics, characterising the split as less about the direction of rates, and instead, or more about the timing. This gives the vote split a more hawkish tone than might be evident at first glance.
Context is important – since August 2025, the RBA has been repeatedly surprised by strength in inflation and growth. With an already tight labour market and little / no insurance against the risk of higher inflation and rising inflation expectations, a further tightening of monetary policy was the prudent course of action. We continue to expect a further 25bp rate hike in May. Given the developments in the inflation outlook in recent weeks, the strong starting point for the labour market and GDP growth, it is unlikely that a modest 50bp recalibration of monetary policy is enough to deliver outcomes consistent with inflation returning sustainably to the target band.
Unattributed Votes
The Statement noted that today’s decision was made by majority, with five members voting to increase the cash rate by 25bp and four members voting to leave the cash rate unchanged at 3.85%.
- Sally Auld, NAB Chief Economist
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