RBA Rate Hike Policy Divergence Emerges, What Will the Fed Do This Week?

TradingKey - The Reserve Bank of Australia (RBA) raised its benchmark interest rate for the second consecutive month on Tuesday, announcing a 25-basis-point hike to 4.1%, a ten-month high, in a move aimed at curbing persistently high inflation.

The rate hike decision passed by a slim 5-4 margin, representing the most divided vote since the bank began releasing voting details. Four members voted to keep the interest rate unchanged at 3.85%.

Hawkish views argued for preemptive action to prevent inflation expectations from becoming unanchored, especially as geopolitical tensions drive up oil prices; dovish views likely expressed greater concern over the impact of aggressive hikes on already weakening consumption and overall economic growth, maintaining that the effects of current financial tightening have not yet fully materialized and there is no need to rush further action.

Analysis suggests the RBA's rate hike in this cycle placed more weight on inflationary pressures from surging energy prices, originating from a "preemptive" stance against inflation; given the 2.6% year-on-year GDP growth in Q4 2025, economic fundamentals still support the RBA's tightening policy.

Senior RBA officials previously warned of action at this meeting due to core inflation persisting at 3.4%, above the 2%-3% target range. Market expectations had called for three rate hikes this year, yet two have already occurred as of March.

In its statement, the RBA explicitly noted that although inflation has retreated significantly from its 2022 peak, it saw a significant rebound in the second half of 2025.

On an international level, the conflict in the Middle East remains the primary source of uncertainty. Fuel prices have risen sharply, and if the conflict continues, it will directly drive up global energy prices and transmit to global inflation data via supply chains.

This week, central banks from several major economies, including the Bank of Japan, the Bank of England, and the European Central Bank, will announce their latest interest rate decisions, with market focus centered on the Federal Reserve's rate decision on March 18, ET.

The Federal Reserve is likely to "stand pat," though divisions also exist.

Based on current market pricing, the Fed is highly likely to keep interest rates unchanged at this meeting. While January core PCE and February CPI data met market expectations, the overall inflation trajectory is not yet fully clear, and disappointing non-farm payroll data has clouded the path for rate cuts, despite the high probability of the Fed remaining "on hold" in March.

Similar to the RBA, internal divisions may also exist within the Fed. Between the hawkish and dovish camps, the hawkish stance may argue that with the Middle East conflict pushing up oil prices, there is a risk of a "second wave" of inflation, especially as energy prices could transmit to core inflation in the coming months.

The dovish stance may argue that financial conditions have already tightened significantly, which, combined with weakening non-farm economic data, means maintaining excessively high rates could intensify downward pressure on the economy. Previously, Fed Governor Milan has repeatedly advocated for early and substantial rate cuts, arguing that the current economy lacks robust real price pressure.

Investors need to focus on the signals from this FOMC meeting's policy statement and the dot plot. If the dot plot reflects a cautious outlook—where the majority of officials remain hawkish—expectations for rate cuts this year will be sharply curtailed, which would likely exert significant pressure on global assets, particularly equities.