Quick overview

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Australia’s central bank warned that “the conflict in the Middle East has triggered a sharp rise in fuel prices,” setting the tone for a pivotal week in global monetary policy as the Federal Reserve, the European Central Bank, and the Bank of England prepare to announce their decisions.

The Reserve Bank of Australia (RBA) kicked off the week on Tuesday by raising its benchmark rate by 25 basis points to 4.1%. The move reversed two of the three rate cuts delivered last year and pushed borrowing costs to their highest level in ten months, reflecting the inflationary impact of the Middle East conflict.

The central bank justified the decision as necessary to contain inflationary pressures, which remain above its 2%–3% target range, in the context of a labor market that policymakers still view as tight.

However, the decision revealed a deeply divided board, passing by a narrow 5–4 vote — the closest split since the RBA began publishing individual voting outcomes.

In its statement, the board emphasized that “the conflict in the Middle East has led to a sharp increase in fuel prices” and warned that, if sustained, this trend “will contribute to inflation.”

It also noted that short-term inflation expectations are already rising and that “risks have tilted further to the upside.”

A pivotal week for central banks

The RBA’s decision marks the starting point of a critical week for global central banks, as escalating geopolitical tensions and rising oil prices test policymakers worldwide.

The Federal Reserve began its policy meeting on Tuesday, with its decision due on Wednesday. While markets broadly expect rates to remain unchanged this month, attention will focus on updated inflation projections and comments from Chair Jerome Powell.

Meanwhile, the European Central Bank and the Bank of England are also set to announce their decisions on Thursday. In both cases, policymakers are expected to hold rates steady, despite mounting inflation risks tied to energy prices.