Australian Central Bank Raises Rates for Second Consecutive Month This Year, Developed Economies May Have Entered Rate Hike Cycle

Questioning AI · How Middle East Tensions Are Accelerating the RBA’s Continuous Rate Hikes

Text / Ran Xuedong

On Wednesday, March 18, the Federal Reserve announced its interest rate decision, holding steady as expected.

Fed Chair Jerome Powell stated that without evidence of progress on inflation, there will be no rate cuts. He confirmed that he will remain in his position during the investigation period, and if his successor is not confirmed by the Senate, he will continue to serve as acting chair after his term ends. Traders estimate only a 50% chance of a rate cut this year, down from 100% on Tuesday.

Before Powell finished speaking, asset prices fluctuated sharply. Spot gold fell $193, LME copper futures dropped $430, and due to Middle East tensions, Brent crude oil surged above $106. U.S. major stock indices triggered a global stock market decline.

Fed Governor Michelle Bowman continued to advocate for a 25 basis point rate cut. The statement added that the impact of Middle East tensions on the U.S. economy is uncertain, changing the language from “unemployment rate is expected to remain stable.” The dot plot shows seven members expect no rate cuts this year, 12 anticipate at least one cut, and one expects a rate hike next year. The Fed raised its GDP forecasts for this year, next year, and the longer term, with inflation expectations rising to 2.7% and 2.2% for this year and next.

The primary factor influencing the Fed’s decision is the Middle East situation, especially the closure of the Strait of Hormuz, leading to rising oil, natural gas, and fertilizer prices. As these are fundamental to industry and agriculture, prolonged conflict could trigger global inflation. Due to significant uncertainty, market expectations remain very cautious.

Recently, another indicator suggests inflationary pressures are forming in the U.S. economy. Data released by the U.S. Department of Labor on March 18 show that the Producer Price Index (PPI) increased by 3.4% year-over-year in February, beating expectations of 3.0% and accelerating from 2.9%. The month-over-month increase was 0.7%, the largest since July 2025, well above the expected 0.3%, and higher than the previous 0.5%.

Core PPI (excluding food and energy) rose 3.9% YoY, above expectations of 3.7% and the previous 3.6%. MoM, it increased by 0.5%, also surpassing the expected 0.3%, and the previous 0.8%, both reaching the highest levels since January 2025.

Due to the reversal of inflation trends in the U.S. and the impact of Middle East tensions on prices, the previous cycle of rate cuts in developed economies may be ending, with more countries entering rate hike cycles.

On March 17, the Reserve Bank of Australia announced a 25 basis point increase to 4.10%. This is the second consecutive rate hike this year. In early February, the RBA raised rates by 25 basis points to 3.85%, marking its first increase in over two years.

The RBA stated that current inflation remains above target and faces ongoing upside risks. Additionally, the conflict in the Middle East has caused fuel prices to rise significantly. If this trend continues, it will further push inflation higher.

Latest data from the Australian Bureau of Statistics show that, over the 12 months ending January, the Consumer Price Index (CPI) increased by 3.8%, above the RBA’s target range of 2-3%.

The RBA’s statement noted that the Middle East situation “could, under various scenarios, push up both global and domestic inflation.” Short-term inflation expectations have risen, and inflation may remain above target for some time. The RBA emphasized that there is a “material risk” that inflation will stay above the target in the long term.

Most economists expect the RBA to hike another 25 basis points in May, bringing the cash rate to 4.35%, fully reversing the 75 basis points of cuts made last year.

Expectations for a rate hike by the European Central Bank (ECB) are rapidly increasing.

Ongoing tensions in the Middle East, disruptions in the Strait of Hormuz, and sharp rises in international oil and natural gas prices, along with increases in chemical products like fertilizers, have heightened concerns about inflation in the Eurozone.

For the ECB, traders generally expect no immediate rate hike at the March 19 meeting, but markets have already priced in a 25 basis point increase to 2.25% before July, with some even speculating that rates could rise to 2.5% by the end of the year.

Market forecasts for 2026 suggest Eurozone inflation could exceed the previous estimate of 2.1% by 0.7 to 1 percentage points, reaching over 3%.

The Asian countries most affected by this energy shock are South Korea and Japan. If the Iran conflict persists beyond three months, the likelihood of rate hikes in South Korea may increase. Rising oil prices make the Bank of Korea more sensitive to inflation, and prolonged Middle East tensions could push inflation above the 2% target, triggering rate increases.

Most market analysts expect the Bank of Japan to keep its benchmark rate unchanged on March 19, as soaring oil prices complicate efforts to achieve the 2% stable inflation target. The Middle East crisis could push Japan’s economy toward stagflation, characterized by weak growth and high inflation.

So, will Japan hike rates or not? That remains a difficult question.