Financial markets were pricing in about a three-quarter chance that the Reserve Bank would lift the cash rate by 25 basis points on Tuesday, after headline inflation surged to 4.6 per cent in March.
Inflation was already well above target before the Middle East conflict closed the Strait of Hormuz, sending global energy markets into chaos, and surging fuel prices have only amplified the central bank's inflation headache.
Cargo ships and oil infrastructure were reportedly damaged on Monday as hostilities briefly resumed in the vital shipping lane.
The benchmark Brent crude oil price jumped 5.5 per cent to about $US114 a barrel as traders considered the risk to inflation of an even longer disruption to energy supplies, Westpac economist Ryan Wells said.
Prime Minister Anthony Albanese said Australians were under financial pressure from a conflict on the other side of the world in which Australia was not a participant.
"We want to see the conflict end because it is having a massive impact on the global economy," he told reporters in Brisbane.
If the RBA did hike rates again, it would be the government's fault for years of overspending, said Opposition Leader Angus Taylor.
Economists at the Commonwealth Bank, NAB, ANZ, Westpac, AMP, Deutsche Bank, Challenger, JP Morgan, HSBC and Citi all predict Reserve Bank governor Michele Bullock will announce a hike following the bank's meeting at 2.30pm.
That would bring the cash rate back to the peak of 4.35 per cent before the RBA's short-lived cutting cycle in 2025.
For an average borrower with a $600,000 mortgage, the three consecutive hikes since February will cumulatively add more than $270 a month in interest repayments.
Citi economists Faraz Syed and Josh Williamson expect the board to be less split than in the March meeting, when only five of the nine members voted for a hike.
"Pass through from inflation has been stronger than expected, with construction costs, international airfare prices and food prices all expected to rise over the coming quarters, whether a Middle East peace deal is achieved tomorrow or not," the duo said.
Just as closely watched will be the Reserve Bank's Statement on Monetary Policy, which contains updated economic forecasts by bank staff and provides clues about the future path of interest rates.
IG market analyst Tony Sycamore expects inflation forecasts to be increased in the near term before being lowered further out, reflecting slower economic growth as a result of higher oil prices and interest rates.
For now, spending has remained resilient despite the oil shock.
Household spending data released by the Australian Bureau of Statistics on Tuesday showed a 1.6 per cent rise in March.
While growth was largely driven by higher fuel costs, rising discretionary spending showed households were relatively resilient, Oxford Economics Australia lead economist Ben Udy said.
Commonwealth Bank payments data, which was up 6.7 per cent in the first four weeks of April compared to the same period a year earlier, also showed no signs that the recent sharp pullback in sentiment had materially changed household spending decisions, CBA economist Ashwin Clarke said.
NAB chief executive Andrew Irvine said borrowers were coming into the situation in a good position despite the economic conditions.
But housing inflation is likely to pick up further as prices for building materials, which were already elevated following the post-COVID-19 pandemic inflation surge, are impacted by the Middle East war.
Dwelling approvals had been improving before the conflict, with the trend rate rising to 17,657 in March despite the number of consents falling 10.5 per cent for the month, the Australian Bureau of Statistics reported on Monday.
"However, headwinds are building as higher interest rates and rising construction costs weigh on the sector," CBA economist Lucinda Jerogin said.
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