The Reserve Bank of Australia raised its cash rate by 25 basis points to 4.6% on Tuesday, the fourth increase this year and the highest level since 2011. The board's decision was unanimous, and the accompanying statement made clear this may not be the last hike. Markets are already pricing in another move by February and a coin-flip chance of a further increase by mid-2027. The RBA's statement pointed to two inflation accelerants operating on different scales. Globally, the broadening US war on Iran is pushing fuel costs higher across supply chains, with the board explicitly warning that further escalation could simultaneously raise prices and drag down economic activity — the textbook stagflation scenario central banks dread. Domestically, the AI investment boom is adding demand-side pressure, and businesses are either already lifting prices or signaling they will. Underlying inflation is expected to come in at 3.6% annual pace for August — the third consecutive month at that level and well above the RBA's 2-3% target band. The previous three hikes this year appear to be slowing the economy, but not fast enough to satisfy the board's inflation mandate. The RBA is explicit: it will keep hiking if needed. Treasurer Jim Chalmers moved quickly to deflect blame from government spending to the geopolitical shock. "When you see what's happening with global oil prices, when you see what's happening with the re-escalation of the war in the Middle East, obviously, factually, that is one of the big drivers of that inflation," he told Channel Seven. He is not wrong about the oil channel, but the framing conveniently sidesteps the question of whether domestic fiscal policy is compounding the problem. Markets responded predictably. The Australian dollar ticked up from 70.11 to 70.17 US cents as higher rates attract yield-seeking capital. Bond yields rose. The ASX200 slipped from 8,697 to 8,671 as equity investors priced in tighter financial conditions and weaker consumer spending ahead. The structural problem is now visible: the RBA is using domestic monetary policy to fight inflation partly caused by a geopolitical shock it cannot influence. Each rate hike crushes borrowers — millions of variable-rate mortgage holders — without touching the oil-price transmission mechanism. The board knows this. Its statement acknowledged the war could push inflation higher while simultaneously weakening global growth. The tool and the problem are mismatched. Governor Michele Bullock's 3:30pm press conference will be watched for any signal on the terminal rate. But the honest answer is that the RBA doesn't know where rates peak, because that depends on a war in the Middle East, not on Australian housing demand.
