RBA Preview: Why a 25bps hike to 4.1% is the most likely outcome

The meeting of the Reserve Bank of Australia is scheduled for Tuesday March 17, 2026 at 03:30am GMT. The transition from a period of disinflationary hopes in 2025 to a “live” hiking cycle in early 2026 represents one of the most abrupt pivots in recent Australian central banking history.

At the center of this volatility is the escalation of the US-Israeli conflict with Iran, which has transformed from a regional skirmish into a systemic threat to global energy security and maritime trade.

The closure of the Strait of Hormuz, a critical artery for roughly 20% of the world’s liquid energy supplies, has introduced a “nightmare scenario” for policymakers: a classic supply-side shock that threatens to unanchor inflation expectations while simultaneously suppressing economic activity.

Prior to the conflict in the Middle East though, markets were already leaning toward an RBA rate hike at Tuesday’s meeting.

What are markets expecting?

As things stand market participants and economists are still leaning toward a 25-basis-point (bps) rate hike, which would take the cash rate to 4.1%.

Market Pricing: Overnight index swaps (OIS) currently imply a 68% probability of a hike, a significant jump from early March expectations.

Hawkish Signaling: Recent comments from Governor Michele Bullock and Deputy Governor Andrew Hauser have labeled the March meeting as “live”. Hauser specifically warned that keeping rates too low could fuel a “damaging rise” in inflation expectations.

This seems like the most likely outcome for tomorrow as the RBA remains concerned about inflationary pressure.

The board are worried that their current strategy isn’t doing enough to slow things down. Right now, the interest rate is 3.85%, but since prices are rising by 3.8%, the “real” cost of borrowing is basically nothing.

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In simple terms, when the interest rate and the inflation rate are almost the same, the policy is “neutral”, it isn’t really helping or hurting. Because almost everyone who wants a job has one (full employment), the economy is running very hot.

To actually cool things down and stop prices from climbing, the bank believes they need to move past this neutral point and make borrowing expensive enough to discourage extra spending.

Outlook moving forward

The March decision may be the start of a renewed tightening phase rather than a one-off move.

• Further Hikes: Several major banks (ANZ, CBA, NAB, Westpac) now expect a follow-up 25bps hike in May, potentially bringing the terminal rate to 4.35%.
• Prolonged Target Horizon: In February, the RBA forecast that trimmed mean inflation would not return to the target band until H1 2027 and wouldn’t reach the 2.5% midpoint until H1 2028.
• Economic Slowdown: Tighter policy and energy price headwinds are expected to lower 2026 GDP growth to roughly 1.9%, with unemployment potentially rising toward 4.5% by year-end.

  Now of course, if the war in the Middle East persists and oil prices remain high the entire outlook may change and inflation may surge.

  A lot to consider not just for the RBA but global central banks if the Middle East conflict drags on at the current pace.

  Market reactions and AUD/USD technical dynamics

  The Australian dollar (AUD) has been highly sensitive to the shifting RBA outlook. Throughout mid-March, the AUD/USD pair has experienced a “tug-of-war” between domestic hawkishness and global risk aversion.

  While the US dollar (USD) has strengthened as a safe-haven asset due to the Iran conflict, the AUD has been supported by the rising probability of a 4.10% cash rate.

  Technically, the AUD/USD reached a 45-month high of 0.7189 in the middle of the week prior to the meeting, but has since pulled back to test the 0.7000 handle.

  If the RBA hikes as expected but adopts a more patient or “wait-and-see” tone for the future, the AUD could see a “sell the fact” reaction, potentially dropping toward the 0.6940 support level.

  Conversely, a hawkish statement that explicitly points toward a May hike and a 4.35% terminal rate could propel the AUD/USD back toward the 0.7200 mark.