Interest Rates Move Higher: What It Means for Investors

Interest Rates Move Higher: What It Means for Investors

The Reserve Bank of Australia has increased the cash rate by 25 basis points to 4.10% at its March meeting, in a closely contested 5:4 decision.

While the move was widely anticipated, the narrow split highlights a more finely balanced outlook for monetary policy, with all Board members agreeing that further tightening is required but differing on the timing.

Inflation pressures prove more persistent

Although inflation has declined significantly since its peak in 2022, the second half of 2025 saw a material pick up. According to the RBA, recent data suggests this reflects a combination of stronger capacity pressures in the domestic economy and external factors.

In particular, the ongoing conflict in the Middle East has driven a sharp increase in fuel prices. If sustained, this is expected to add to inflation in the near term. Short term inflation expectations have already risen in response, increasing the risk that inflation remains above target for longer than previously anticipated.

Stronger demand and a tighter labour market

The RBA also pointed to stronger than expected momentum in private demand through late 2025. Business investment exceeded expectations, while consumption was somewhat softer than forecast.

At the same time, labour market conditions remain tight. The unemployment rate has been slightly lower than expected and measures of labour underutilisation remain low. These conditions suggest that capacity pressures in the economy are still elevated and may be slightly greater than previously assessed.

The RBA continues to estimate that Australia’s supply capacity is growing at around 2%, reinforcing the view that relatively modest levels of demand growth can generate inflationary pressure.

Financial conditions and policy uncertainty

Financial conditions have tightened somewhat in recent months, with increases in market interest rates, bond yields and the exchange rate. However, the RBA noted that the extent to which monetary policy is currently restrictive remains uncertain.

Credit remains readily available and the full effects of earlier rate reductions in 2025 are still flowing through to the economy. This adds another layer of complexity to the policy outlook.

The Board also emphasised that there are material uncertainties surrounding both domestic activity and inflation, as well as the broader global environment.

Global risks remain elevated

Developments in the Middle East are a key source of uncertainty. A prolonged or more severe conflict could place further upward pressure on energy prices, lifting inflation both in the near term and potentially over a longer horizon if supply capacity is affected.

At the same time, higher energy prices and sustained uncertainty could weigh on global growth, including in Australia’s major trading partners. This creates a more complex environment for policymakers, with risks to both inflation and growth.

What this means for interest rates

The RBA’s assessment is that inflation is likely to remain above target for some time, with risks now tilted to the upside. As a result, further rate increases remain a possibility, although the timing will depend on how incoming data and global developments evolve.

The split decision at this meeting suggests that future moves will be more finely balanced, with the Board closely monitoring labour market conditions, domestic demand and inflation expectations.

Positioning in a higher rate environment

In response to the higher interest rate environment, we have increased the Skyring Fixed Income Fund variable distribution rate to 7.20% per annum, effective 1 April 2026.

This ensures the Skyring Fixed Income Fund remains aligned with prevailing market conditions while continuing to deliver competitive income outcomes for investors.

The Skyring Platinum Fixed Income Fund variable distribution rate remains unchanged. This fund continues to be competitive in the current environment and remains well positioned to provide attractive returns for investors without any change at this time.

Looking ahead

The outlook for monetary policy is becoming more complex. While inflation remains the central focus, global risks and domestic capacity constraints are playing an increasingly important role in shaping the path forward.

We will continue to monitor these developments closely and adjust to ensure our funds remain well positioned in the changing economic environment.