Background: The Reserve Bank of Australia (RBA) is Australia's central bank, responsible for keeping inflation stable and the economy on track. Its main tool to do this is the cash rate, which influences borrowing costs across the economy.

What happened: Yesterday, the RBA has just raised the cash rate by 0.25% to 4.10%, matching the level from April last year. This means the RBA has pushed two rate hikes in just two months. But it wasn't unanimous. In fact, there was a 5-4 split among board members.    

What else: The war in the Middle East has pushed global oil prices sharply higher, which has flowed into rising petrol prices in Australia. In fact, some economists now warn inflation could climb back above 5%. And while rate hikes can't fix oil shocks directly, the RBA is trying to cool overall spending in the economy.  

What's the key learning?

💡The economy runs on a global domino chain and interest rates are one of the RBA's only ways of stopping it from spiralling. Inflation is either driven by:

• An increase in demand (ie Aussies spending more money); or
• A decrease in supply (ie less oil available).

Events like wars can reduce the supply of oil, which ultimately drives up prices globally.  

💡Oil prices have been spiking hard, jumping from around US$70 to as high as US$116 per barrel. In Australia, petrol rose 17% and diesel 15.6% in early March. So clearly, these supply shocks are able to hit everyday costs.  

💡 The RBA can't control oil prices, but it can influence how much Australians spend. By raising rates, it slows demand to help curb inflation even when external shocks occur.