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Insights

Insights

Inflation at 4.6%, rates at 4.10%: what the current RBA cycle means for your portfolio

In March 2026, the Reserve Bank of Australia raised the cash rate by 25 basis points to 4.10%. The decision was made by a majority of five votes to four — the narrowest possible margin. It was the second increase of 2026, following a unanimous hike in February, and it came against a backdrop that had shifted materially since the RBA began its cutting cycle in 2025.

The proximate cause of the reversal was clear. Annual inflation, which had been moving back toward the RBA's 2–3% target, rose sharply to 4.6% in March. The fuel component was the dominant driver: regular unleaded petrol prices rose 33% in the month, and diesel rose 41% — the largest monthly fuel price increase since the ABS began recording the series in 2017. The underlying cause was equally clear. The closure of the Strait of Hormuz following the US-Israeli strikes on Iran in late February removed approximately 10 million barrels per day of oil supply from global markets. Australian fuel prices are a direct transmission channel for that disruption.

The RBA's March statement was explicit: the conflict in the Middle East had materially increased the upside risk to inflation, and the Board judged that acting on that risk was preferable to waiting for it to manifest more fully in the broader price level.

What the rate environment now looks like

The cash rate stands at 4.10%. The RBA Board meets on 4–5 May, with a decision to be announced on the afternoon of 5 May. As of the date of writing, market pricing implies a meaningful probability of a further 25 basis point increase to 4.35%. CBA's economics team expects that outcome, noting that while the trimmed mean inflation figure for the March quarter came in slightly below forecast at 3.5%, underlying domestic price pressures remain too elevated for the Board to pause comfortably.

Whether the May decision produces another increase or a hold, the broader picture is the same: the RBA is in a tightening cycle that was not anticipated twelve months ago, driven by an external shock that has not yet resolved. The interest rate environment that borrowers and investors are navigating in May 2026 is materially different from the one they were navigating in mid-2025.

The implications for borrowers

For clients carrying variable rate debt — mortgages, investment property loans, business finance facilities — the cumulative impact of two increases in 2026, following the cuts of 2025, is significant. A borrower with a $700,000 variable mortgage is paying materially more per month than they were twelve months ago. A borrower who fixed their rate in 2024 and faces a refix decision in 2026 is confronting a different set of options than those available when they first fixed.

The discipline that matters most in this environment is cash flow clarity: knowing exactly what is being paid on each facility, understanding the refinancing options available at current rates, and maintaining a liquidity buffer that absorbs further rate movements without creating pressure on other financial commitments. Clients who reviewed their debt position in the easing cycle of 2025 may find that review is worth repeating now.

The implications for investment portfolios

Higher interest rates reprice assets in predictable ways. The assets most directly affected are those whose valuations are most sensitive to the discount rate applied to future cash flows — long-duration fixed income and growth equities in particular. Property, which had begun to recover in parts of the Australian market, faces renewed headwinds from higher borrowing costs and reduced consumer confidence.

The asset classes that tend to benefit, or at least hold their ground, in a higher rate environment are different: shorter-duration fixed income, where yields now reflect the elevated cash rate; real assets and infrastructure, which can pass through inflation over time; and international equities with genuine earnings breadth that reduces sensitivity to Australian rate conditions specifically.

We do not make wholesale portfolio rotations in response to individual rate decisions. What we do is ensure that the portfolios we manage are positioned with an explicit view of the rate environment — not assuming rates will fall quickly, not assuming they will remain elevated indefinitely, but structured to perform across the range of plausible paths.

What we are watching

The critical variable for the second half of 2026 is the trajectory of energy prices. If the Iran conflict moves toward a durable resolution and the Strait of Hormuz reopens to normal commercial traffic, the primary source of Australia's current inflation overshoot diminishes. That would give the RBA the data it needs to pause and, eventually, to begin easing again.

If the conflict persists and energy prices remain elevated, the RBA faces a more difficult set of choices: continuing to tighten into a slowing economy, or tolerating inflation above target for longer than its mandate would suggest is appropriate. Neither scenario is benign for portfolios concentrated in rate-sensitive assets.

We are watching the energy situation, the monthly CPI data, and the RBA's forward guidance closely. If you would like to work through the implications for your specific position, we welcome the conversation.

Ben Wieland
Partner, Wealth Manager

1300 102 542 | 0423 710 820
ben@egu.au

Sources

This is general advice. It does not take account of your objectives, financial situation, or needs, and is not a substitute for advice that does. Before acting on anything in it, consider whether it suits your circumstances, and consider the relevant Product Disclosure Statement.

Ben Wieland