Australia central bank hikes 25bp to near 1-year high; Iran war risks

The Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 3.85% at its February meeting, marking a return to a tighter stance as inflation risks have re-emerged. The decision was broadly in line with market pricing and Reuters poll expectations.

In its accompanying assessment, the RBA cited above-target inflationary pressures and a tight labour market as key considerations, revising up near-term growth and inflation forecasts. The board signalled that a couple of additional rate increases could be necessary if inflation proves persistent, shifting from the earlier easing bias in light of fresh data.

Markets reacted quickly: the Australian dollar strengthened against the U.S. dollar and government bond yields moved higher after the announcement. Oil and precious metals also showed volatility as geopolitical tensions in the Middle East — notably between the U.S. and Iran — pushed oil prices up, creating an external source of inflationary pressure that reinforced the RBA’s hawkish tone.

The episode underscores how external shocks, especially energy supply risks linked to the Iran conflict, can alter the inflation outlook and complicate monetary policy. Global central banks are watching commodity markets closely because any sustained rise in energy prices could translate into broader price pressures, potentially prompting further tightening.

Looking ahead, economists and market strategists expect the RBA to remain data-dependent: stronger-than-expected inflation prints or continued oil price upside would increase the likelihood of further hikes, while signs of cooling domestic demand could temper that trajectory. Investors will likely focus on upcoming CPI releases, labour data and developments in Middle East geopolitics for clues on the RBA’s next moves.