RBA Weighs Another Rate Hike on Oil Shock

That combination matters economically because it tightens the trade-off at the heart of monetary policy. The RBA has already pushed the cash rate to 4.6%, a 15-year high, and borrowers are feeling the pressure: home owners paid a record $21 billion in interest in the three months to June. Yet inflation remains above target, having sat outside the 2% to 3% band for three of the past four years, and recent price data suggest fuel is still doing damage. Australian inflation rose 0.4% in August and would have fallen were it not for higher petrol costs.

Markets have already moved to price in a less aggressive path. Ahead of the latest labour-market figures, investors saw roughly a one-in-three chance of the cash rate rising to 4.85% at the November meeting; after weaker jobs data, that fell to about one-in-five. That repricing reflects a growing belief that the RBA will want to avoid squeezing activity further as the jobless rate rises, but it does not remove the risk that renewed inflation pressure forces its hand.

The bank’s own conference papers published Friday show it is focused on the same dilemma. Governor Michele Bullock and senior researcher Anthony Brassil argued that a supply shock such as a surge in oil prices leaves central banks unable to offset the real economic loss. Monetary policy can only decide how the pain is distributed between higher inflation and weaker employment. They also noted that high inflation hits lower-income households hardest, especially those without mortgages and with limited financial buffers, while rents have already surged over the past three years.

The broader concern is that this is no longer just an Australian problem. Central banks globally are wrestling with the same mix of energy-driven inflation and slowing growth, while the International Energy Agency has warned that diesel prices, though off their highs, remain almost double pre-war levels and are now affecting real incomes and activity. Analysts say disruptions in the Strait of Hormuz and attacks on Russian refineries have kept refined fuel costs elevated, while food and industrial commodities are also rising.

AMP chief economist Shane Oliver said the conflict was hurting the global economy through oil prices, and the IMF has pointed to an added drag from the AI construction boom, which is pulling in capital and resources at the same time as energy markets tighten. The implication for the RBA is that inflation may prove stickier than its models expected, just as domestic demand and employment soften.

For investors, the near-term question is whether the bank leans into its inflation mandate and risks aggravating the slowdown, or holds steady and tolerates a longer period of above-target prices. A further hike would support the Australian dollar and could pressure rate-sensitive sectors, while a pause would ease borrowing stress but leave real yields and inflation expectations more uncertain. Either way, the next two RBA meetings and next month’s updated forecasts now look pivotal.