Steve Campbell: RBA fires another rocket at inflation war

One more RBA rate hike, but the real story is what comes next as Middle East risks reshape Australia’s inflation outlook. Pendal’s head of cash strategies STEVE CAMPBELL explains

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THE Reserve Bank of Australia (RBA) tightened monetary policy by 25 basis points, taking the cash rate to 4.35%.

The vote to hike was 8-1. The one dissent was for no change.

The vote to tighten at their March meeting was 5-4.

This was the third consecutive meeting where the RBA tightened policy and was widely expected. The market priced a 75% probability that the RBA would hike leading into today’s decision.

Much of the language in the statement revolved around events in the Middle East. With 3 consecutive hikes the RBA see themselves in a good position to deal with the challenges that lay ahead.

Their language did not set up expectations for another hike in late June as being more than likely.  

The Reserve Bank of Australia’s Statement on Monetary Policy (SoMP), released alongside today’s decision, included an updated set of economic forecasts.

Not surprisingly there have been significant revisions given their previous forecasts were made to prior to the Middle East conflict. The RBA’s baseline forecast assumes that the conflict is resolved soon.

The following tables show the RBA’s latest forecasts and the forecast changes from their February SoMP.

Starting with inflation, and no surprises to see upward revisions in the nearer term.

In their previous forecasts annual trimmed mean inflation was seen to peak at 3.7% in mid-2026.

Trimmed mean for 2026 was forecast at 3.2%, before returning to within the 2-3% target band in 2027.

The updated forecasts have pushed this further out, with inflation hitting 3.1% for the year ending June 2027.

It is then expected to be 2.6% for 2027, 0.1% lower than previously forecast.

The following graph shows the RBA’s annual trimmed mean inflation forecasts since August 2024:

As can be seen there were significant upward revisions in late 2025.

This was in response to a pickup in private demand, a tight labour market and the economy running with little spare capacity.

The RBA had an inflation problem prior to the Middle East conflict. The upward pressure on fuel prices has only added to those pressures.

Inflation is expected to moderate further out as weaker growth leads to the unemployment rate rising.

Economic growth for 2026 was revised 0.5% lower to 1.3%, weighed down by the fall in real household disposable incomes.

The unemployment rate is forecast to hit 4.7% in 2 years’ time.

Where to next for RBA?

The key focus will be on the second-round inflationary effects. The RBA noted in their statement that ‘there are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services’.

The RBA’s fear is that inflation expectations become embedded.

Those fears would be alleviated somewhat if the labour market slackens and the unemployment rate moves higher. It is too tight at the moment.

If the conflict ends up becoming more protracted, they will favour containing inflation over supporting economic growth. That means further policy tightening.

The market ended today pricing a further rate hike occurring in the third quarter this year.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.

About Steve Campbell and Pendal’s Income and Fixed Interest team

Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.

Find out more about Pendal’s cash funds:

Short Term Income Securities Fund
Pendal Stable Cash Plus Fund

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here