Cash rate hike a step in the right direction, but will not ease oil prices

Earlier this week, the RBA increased the cash rate by 25 basis points to 4.10 per cent at its meeting on Tuesday (17 March), marking the first hike in two years.

Considering that inflation remains the RBA’s central concern, Commonwealth Bank head of Australian economics Belinda Allen said that rates are likely to increase again in May.

Further, the RBA board said that the conflict in the Middle East has led to higher fuel prices, which, if sustained, will add to inflation.

BDO chief economist Anders Magnusson said that rising oil prices following the start of the war in Iran have arisen as a new challenge for the RBA, with these prices feeding directly into inflation through fuel costs and higher transport and supply-chain costs across the economy; with the RBA concerned that higher transport and supply-chain costs will lead to persistent inflation pressure.

“The rate increase reflects both that structural inflation problem and the additional upward pressure on prices flowing from higher oil prices,” Magnusson said.

Wealth Within senior analyst Filip Tortevski said: “Oil has already been trading between roughly $80 and $120 a barrel, and that kind of volatility feeds directly into fuel, transport and broader living costs. From the RBA’s perspective, acting now may have been about preventing another wave of inflation expectations from becoming embedded in the economy.”

Tortevski called the situation at the Strait of Hormuz critical. “If tensions ease, oil prices could settle quickly. But if the conflict escalates, the impact on global energy prices and inflation could be significant.”

Impacts on small businesses

Magnussen said that this global slowdown would flow through to Australia via weaker demand for our commodity exports, noting that raising the cash rate adds an additional risk to growth and to the RBA’s full employment mandate.

Employment Hero chief executive and co-founder Ben Thompson said this move would test the resilience of Australian business owners, as they begin favouring casual hires over permanent roles, noting that consumer confidence is at its lowest since July 2023.

Based on Employment Hero’s jobs report data, casual hiring is up 9.4 per cent year-on-year, with full-time and part-time hiring lower at 4.2 per cent and 2.3 per cent, respectively. Thompson said that another rate hike will accelerate the favouring of casual employees, with workers seeking job security having to wait longer to secure a full-time or part-time role.

Xero economist Louise Southall said the rate hike was disappointing news for small business owners. Referencing the latest Xero Small Business Insights (XSBI) data, the final months of 2025 were shown to be the strongest in years, with December quarter sales growth having recorded the best result since mid-2023 (+6.7 per cent year on year), jobs growth being the strongest in two years (+3.4 per cent year on year) and small businesses being paid quicker than any other quarter in the history of the series (23.9 days).

Southall said that the cash rate increase puts these results in jeopardy, calling the combination of rising oil prices and rising interest rates a double whammy for small businesses, with a likelihood to put pressure on profit margins and cash flow.

She noted that the higher fuel and energy prices are likely to flow through to higher costs for many of the inputs small businesses require. In addition, higher interest rates directly increase the cost of business loans and reduce customers' spending capacity.

“During periods of such high uncertainty it’s easy for small business owners to feel overwhelmed and powerless. It’s more important than ever for owners to focus on the things they can control, and cut out the noise of what they can't,” Southall said.

“That means closely managing cash flow and forecasting well ahead, particularly with Payday Super requirements on the horizon. It also means making it as easy as possible to get paid on time – using digital tools like automatic invoice reminders, including a ‘pay now’ button on invoices and offering customers multiple payment options, all of which increase the likelihood of getting paid on time and reducing cash flow risk,” she added.

Inflation shock hard to ‘look through’

Magnusson said that the cash rate rise is in response to risks that it can no longer ignore, despite the downside risks to growth.

He also stressed that underlying inflation has remained persistently too high, which limits the RBA’s tolerance for new inflation shocks, even when they originate from offshore.

“By raising rates, the RBA appears to be signalling that it remains focused on bringing inflation back toward its target, even if the source of the pressure is largely coming from global energy markets,” Tortevski added.

However, Tortevski warned of the risks that arise from tightening policy in an environment driven by external supply shocks.

“Higher rates can slow spending and economic activity, but they do little to directly control the price of oil. That leaves the RBA walking a fine line, trying to contain inflation without pushing an already fragile economy into a deeper slowdown."

CA ANZ chief economist professor Richard Holden said that the RBA is challenged by global and domestic inflation moving up and economic growth moving down, being forced to raise rates to fight inflation. However, to counter the challenges to economic growth, the RBA would need to cut rates.