Energy Costs Weigh on Growth, Inflation: RBA Minutes

Australia’s inflation remains elevated, with excess demand persisting, according to the Reserve Bank’s March minutes. Rising oil prices, driven by Middle East tensions, were flagged as a key near-term inflation driver, lifting short-term expectations, though longer-term ones stayed anchored. Higher energy costs are expected to weigh on growth domestically and globally, though the scale of impact is uncertain. Policymakers noted financial conditions have tightened slightly but questioned how restrictive current settings are. Most members judged further rate hikes likely necessary to return inflation to target, as risks tilt upward. Supply constraints could worsen amid geopolitical developments, adding pressure. Yet demand outlook remains unclear, given Australia’s energy-export role and resilient household balance sheets. Members estimated that if oil prices hold near USD 100 per barrel, headline CPI could rise to about 5% in the June quarter.

A global supply shock from the war in Iran could lift inflation and long-term expectations, particularly as capacity pressures persist, the Reserve Bank of Australia warned. Assistant Governor Chris Kent said in a speech that the shock “could both push short-run neutral rates higher and necessitate a more restrictive stance of policy.” He cautioned that the longer the conflict endures, the greater the economic fallout and risk of asset repricing. Kent explained that a negative supply shock raises prices while weakening activity, “making us all poorer,” and stressed that central banks cannot offset such shocks directly. Their role, he noted, is to prevent initial price surges from embedding into longer-term expectations. The RBA will continue weighing offsetting forces, tighter financial conditions and rising inflation risks, to guide policy aimed at sustaining price stability and full employment over the medium term.

The Reserve Bank of Australia raised its cash rate by 25bps to 4.1% at its March 2026 meeting, following a hike in February, in line with market expectations. In a split decision, the move was driven by a broad set of data pointing to renewed inflationary pressures in H2 of 2025. While some of the pickup is seen as temporary, the board noted modest labour market tightening and stronger capacity constraints than previously assessed. Elevated uncertainty around the Middle East conflict could add to global and domestic inflation risks. Against this backdrop, the RBA expects inflation to remain above target for some time, with risks skewed to the upside, including through expectations, warranting the latest increase. Policymakers stressed a data-dependent approach, monitoring global and financial conditions, domestic demand, and labour trends. They emphasized that policy remains flexible and positioned to respond as needed, with a continued focus on price stability and full employment.