Iran Conflict Escalates Inflation Risks, Australian Central Bank Raises Rates to Near One-Year High

The Reserve Bank of Australia raised its benchmark interest rate for the second consecutive time on Tuesday, bringing it to 4.1%, the highest level since April 2025, to combat persistent inflation.

The 25 basis point hike was in line with analysts’ expectations from a Reuters survey. Australia’s current inflation rate remains above the central bank’s 3% upper limit, and conflicts in the Middle East could further drive up prices.

In a statement, the RBA said, “Although inflation has fallen significantly since its peak in 2022, there has been a noticeable rebound in the second half of 2025.”

The central bank also noted that the situation in the Middle East remains highly uncertain and could intensify both global and domestic inflation pressures. Inflation may continue to stay above target for some time, with upside risks increasing, making further rate hikes necessary.

HSBC Australia, New Zealand, and Global Commodities Chief Economist Paul Bloxham said domestic factors are the main reason for this rate increase.

“Output gaps are positive, current inflation levels are too high, and unemployment remains low,” Bloxham stated. Australia has one of the tightest labor markets globally, and inflation continues to be above the target range.

He added that ongoing conflicts in Iran are likely to keep pushing Australian inflation higher, and the RBA believes there is no room to wait and see, as global developments are not yet clear.

However, the decision to raise rates was narrowly passed: 5 votes in favor, 4 against.

The RBA’s stance aligns with Deputy Governor Andrew Hozier’s earlier concerns. Hozier said in an interview last week, “We are facing an inflation problem, and the level is too high.”

Hozier emphasized that the central bank expects inflation to return to the 2-3% target range by the end of 2026 or 2027, reaching the midpoint of that range in 2028.

In February this year, the RBA forecasted overall inflation would peak at 4.2% around mid-2026, then decline to “just below 3%” by mid-2027.

Hozier noted that these forecasts might be revised upward, as previous estimates did not account for oil price shocks caused by the Iran conflict.

As of the last quarter ending December, Australia’s inflation rate was 3.6%; January’s monthly inflation was 3.8%, slightly above the 3.7% forecast.

The country’s economy remains strong, with Q4 GDP growing 2.6 year-over-year, exceeding expectations and providing room for the central bank to maintain high interest rates.

Following the announcement, the Australian S&P/ASX 200 index rose 0.11%.