RBA set for second consecutive rate hike as Iran war fuels concerns over high inflation

RBA rate hike is a done deal amid energy-driven inflation risks

As the war in the Middle East continues, central banks globally face a tough call over whether to look through the energy-driven inflation shock or push back against it and risk derailing the economic recovery.

However, the RBA seems well-positioned to counter looming inflation risks by raising the OCR as the economy remains on a solid footing.

Data from the Australian Bureau of Statistics (ABS) showed the Gross Domestic Product (GDP) rose 0.8% in the fourth quarter of 2025, above an upwardly revised 0.5% in the previous ⁠quarter and the market consensus of 0.6%. Annual growth accelerated to 2.6%, the fastest pace since early 2023.

Meanwhile, the monthly Consumer Price Index (CPI) rose 0.4% in January, beating estimates of a 0.3% increase. Moreover, the annual inflation reading held at a firm 3.8%, above forecasts for a deceleration to 3.7%.

During a speech at the AFR Business Summit in Sydney on March 2, Governor Michele Bullock said that the Board was uncertain if financial conditions were sufficiently restrictive to return inflation to the midpoint of the target in a reasonable timeframe, highlighting that developments in the Middle East serve as a reminder of persistent geopolitical uncertainty, and warning that a prolonged shock could add to inflation pressures

Last week, RBA Deputy Governor Andrew Hauser warned that Oil price shocks pose upside risks to inflation amid uncertainty tied to the Iran conflict.

“Volatility in Oil prices and tensions in the Middle East pose a genuine challenge for us [the central bank].” However, “The Australian economy in many ways is in good shape,” he said.

Against this backdrop, ANZ, Westpac, Deutsche, Citi and the National Australia Bank (NAB) revised their call, projecting a rate hike this week.

How will the Reserve Bank of Australia’s decision impact AUD/USD?

The AUD is finding its feet against the US Dollar (USD) as it braces for the RBA showdown.

AUD/USD could stage a solid recovery if the RBA’s MPS and Governor Bullock’s words suggest that rate hikes are here to stay.

On the other hand, the Aussie pair could continue to face bearish pressure if Bullock warrants caution on future rate hikes and delivers a wait-and-see guidance.

Dhwani Mehta, Asian Session Lead Analyst at FXStreet, highlights key technical levels for trading AUD/USD following the policy announcement.

“The major has slipped under the 21-day Simple Moving Average (SMA) near 0.7070, signaling a loss of short-term upside momentum. The 14-day Relative Strength Index (RSI) has retreated toward the mid-40s, indicating fading bullish pressure and reinforcing the corrective tone after the pair failed to sustain gains above 0.7100.”

“Immediate resistance emerges at the 21-day SMA around 0.7070, followed by the 0.7120 area, which limited the pair in February, acting as the next barrier, and 0.7150 capping the topside beyond there. On the downside, initial support is at 0.6980, which supported the sharp decline on Friday, guarding a deeper pullback toward 0.6960, where the 50-day SMA currently rises. A break below that zone would expose the 100-day SMA around 0.6770,” Dhwani adds.

Economic Indicator

RBA Interest Rate Decision

The Reserve Bank of Australia (RBA) announces its interest rate decision at the end of its eight scheduled meetings per year. If the RBA is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Australian Dollar (AUD). Likewise, if the RBA has a dovish view on the Australian economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for AUD.

RBA FAQs

What is the Reserve Bank of Australia and how does it influence the Australian Dollar?

The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.

How does inflation data impact the value of the Australian Dollar?

While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.

How does economic data influence the value of the Australian Dollar?

Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.

What is Quantitative Easing (QE) and how does it affect the Australian Dollar?

Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.

What is Quantitative tightening (QT) and how does it affect the Australian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.

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