Iran War Hits Australia|Rate Hike Odds Surge

Fuel Shock Bites

Australia's inflation just hit 4.6 percent — the worst reading in over two years. But what makes this number different from the last cycle is where it came from. Fuel costs rose 32.8 percent in a single month. That is the largest monthly fuel price increase on record. The mechanism is direct: the US-Iran conflict closed the Strait of Hormuz, a fifty-kilometre chokepoint through which nearly twenty percent of the world's oil and LNG passed before the war. Supply vanished almost overnight. Brent crude climbed above 110 dollars a barrel. Australian pump prices followed within weeks.

The Reserve Bank now faces its worst-case scenario. The RBA has a single inflation target: two to three percent. March's headline print was 4.6 percent. Even the trimmed mean — the board's preferred underlying gauge, which strips out volatile items — came in at 3.3 percent, still above target. Financial markets were pricing three-quarters odds of a hike at the May meeting before the data. All four major banks were already forecasting a rise. Treasurer Jim Chalmers warned that inflation will likely peak even higher before it falls, saying Treasury is still finalising forecasts ahead of the May 12 budget.

Oxford Economics economist Harry McAuley put the dilemma plainly: the longer the Strait remains closed, the fewer options the RBA board will have. A prolonged closure forces multiple hikes this year. Citi's chief economist warned that inflation could approach 5.5 percent by mid-year as fuel costs flow through to construction and food services. The government halved the petrol excise to cushion the blow — without that cut, March's figure would have been higher still. But economists caution that broad untargeted cost-of-living support could complicate the RBA's fight and add pressure rather than relieve it.

Cartel Crack

The same day Australia absorbed its fuel-driven inflation shock, the United Arab Emirates announced it was leaving OPEC — ending a membership of nearly six decades. The move landed as ASX futures were already pointing lower and rattled oil markets before the local session opened. UAE output accounts for roughly nine percent of OPEC's total production. Its exit signals a fracturing of the cartel's supply coordination at exactly the moment the Iran war has already removed Iranian supply from global markets.

The immediate market reaction revealed a split. The ASX 200 fell for a seventh consecutive session. But within that decline, energy was the only sector to close higher. Santos, Viva Energy, and Woodside all gained. Woodside's Q1 report, released the same morning, showed operating revenue of 3.26 billion US dollars — up seven percent quarter-on-quarter — driven by an eleven percent rise in average realised prices. Production fell eight percent due to Cyclone Narelle, but Woodside's CEO noted that higher spot prices will flow through to subsequent quarters under LNG contract pricing structures.

The contradiction is meaningful. A market falling on inflation fears is simultaneously rewarding the companies most exposed to the oil price that is causing those fears. The Abu Dhabi national oil company is expected to expand output independently of OPEC quotas following the exit. That could, in theory, add supply and ease prices — but the timeline is uncertain, and the Hormuz blockade remains the binding constraint. Until the strait reopens, additional UAE barrels cannot fully replace what the war has removed from the market.

Two-Front Squeeze

The collision between a stagflation scenario and a government budget due in two weeks is creating a second layer of uncertainty for Australian investors. Inflation above four percent while growth is slowing is precisely the dynamic that limits policy options on both sides. The RBA cannot ease without re-igniting inflation expectations. The government cannot spend freely without adding fuel to the inflation fire — as multiple economists warned this week. And yet the budget is expected to include household support measures, with the fuel excise cut and a GST rebate on petrol already in place.

There is an additional investor-specific risk taking shape. The Albanese government is finalising a plan to replace the fifty percent capital gains tax discount with inflation indexation for new investments. The change would affect every asset class, including equities. Analysts and financial advisers are warning it would fall disproportionately on younger investors who entered share markets after being priced out of property. The timing — a CGT overhaul announced into a market already down seven sessions in a row — adds a structural question to what is already a cyclical pressure.

The weight of evidence points toward at least one more rate hike at the May 6 RBA meeting, with a second hike later in the year increasingly priced. That path holds as long as the Strait of Hormuz remains closed and fuel prices stay elevated. If a Hormuz deal is reached — Iran submitted a proposal this week, and the US is reviewing it — oil prices could reverse sharply, trimmed mean inflation could stabilise, and the RBA's hand would be freed. The recovery scenario is real, not theoretical: a Hormuz reopening in May would likely arrive before the next CPI print in late July, giving the board room to pause. The verification benchmark is precise — watch the May 6 rate decision and the Hormuz negotiation outcome between now and then. If the RBA hikes and the strait stays closed, the path to 5.5 percent inflation and multiple further hikes is no longer a tail risk. If Iran's proposal advances and oil falls back below 95 dollars, the entire inflation trajectory resets — and the ASX's seven-day losing streak would look like an overshoot.