Minutes of the Australian Reserve Bank Meeting: Uncertain Path of Interest Rates After March Rate Hike, Difficulty in Policy Decision Intensified by Middle East Conflict.

The Reserve Bank of Australia decided to raise interest rates earlier this month with a split vote, believing that monetary policy still needs to remain tight; at the same time, the Board also stated that if the conflict in the Middle East leads to an economic recession, the central bank will take measures to respond at any time. The minutes of the RBA's March monetary policy meeting released on Tuesday showed that given the two rate hikes already this year, coupled with the uncertainty brought by the war, Board members unanimously agreed that they cannot make any confident predictions about future interest rate trends. The minutes stated: "If the conflict continues for a long time, it may have a significant impact on inflation and economic activity. Therefore, members believe that future policy decisions will require the Board to carefully weigh between its two major policy objectives." Earlier this month, the RBA raised interest rates by 25 basis points to 4.1%, reversing two of the three rate cuts in 2025. It was the most hotly contested decision since the bank started disclosing voting results last year, with the Board voting 5-4 in favor of the rate hike. The market expects a 60% chance of another rate hike in May, with further tightening of 65 basis points expected this year. After the unanimous rate hike in February, policymakers believed that monetary policy had not yet reached a tight enough level. All members agreed that further tightening may be needed in the future, but there were differences in timing. The five members who voted in favor of the rate hike believed that the conflict in the Middle East would further squeeze the already limited economic supply capacity and could lead to uncontrolled inflation expectations. They emphasized the importance of a clear commitment to bringing inflation back to target levels. The RBA estimates that if oil prices remain around $100 per barrel, Australia's overall inflation rate in the June quarter will rise to about 5%. The year-on-year increase in the consumer price index in February was 3.7%. "These members acknowledge the importance of closely monitoring the downside risks to future demand... they point out that even with the rate hike, the Board's ability to respond to a more significant contraction in overall demand that may occur will not be weakened." The other four members noted weak household consumption and held a more skeptical view on whether the labor market had tightened in recent months, suggesting that it might be prudent to wait for a while longer before making a decision, until the potential impact of the conflict in the Middle East becomes clearer.