TD Securities strategists Prashant Newnaha and Alex Loo note the RBA lifted the cash rate by 25 bps to 4.10% in a narrow 5-4 decision, driven mainly by elevated domestic inflation and excess demand. They still expect another hike in May but stress that outcome is not assured, with Middle East conflict dynamics and inflation expectations key to the Board’s next move.

Split vote clouds next policy step

"The RBA hiked the cash rate 25bps at its meeting to 4.10%, the first back to back hike since 2023. The Board raised the cash rate because it "….judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations"."

"There was increased speculation in the last week that the Middle East conflict would serve as the likely trigger for today's RBA hike. However it's clear, this was not really the case. The RBA hiked today simply because the cash rate was deemed too low given elevated inflation and excess demand. And at the margin the RBA hiked as insurance against an increase in longer term inflation expectations."

"In particular, "....the Board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed". In other words, the Board became more confident that the pick up in inflation was because there was "greater momentum in demand in the latter part of 2025" implying lower influence via temporary factors."

"Fundamentally the risks still favour the RBA delivering another hike, but the close 5-4 vote places some risk to our call for the next hike in May. The Governor made it clear in the Press Conference that the decision to hike was very very close, reinforcing why a May hike is not assured."

"In rates our bias is to re-engage into flatteners. A positive terms of trade shock and increased hedging from Australia pension funds supports retaining a bullish AUD bias."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)