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[INTRO: AMINE LAOUEDJ, MANAGING DIRECTOR]
Welcome! Once a week, from London, we break down the most consequential global economic event, and we analyze what it means for business.
[LAST WEEK'S KEY ECONOMIC EVENT]
Last week, Australia's central bank, the Reserve Bank of Australia or RBA, raised its base interest rate from 4.10% to 4.35%.
This marks the third consecutive raise this year, after increases in February and March.
To understand why a rate decision in Australia matters to businesses globally, you need to understand what the RBA said was behind this decision. But first, some context.
Since the US and Israeli attack on Iran on 28 February, traffic through the Strait of Hormuz has been restricted. Middle Eastern exports through that route represent 20% of the world's seaborne oil and gas and 30% of global fertilizer trade. Brent crude went from $73 a barrel in January to above $100 last week, having peaked at $126 in early May, with significant volatility throughout.
Regarding interest rates, central banks set them as the base for their economy, which commercial banks pass on with a margin to businesses and consumers through their loans. When inflation is too high, central banks raise rates to make borrowing more expensive, which slows the economy and reduces inflation. When the economy needs support, they cut rates to make borrowing cheaper, which encourages spending and investment.
For two years prior to the conflict, inflation was cooling and central banks were cutting rates. Many businesses built 2026 plans assuming borrowing costs would keep falling.
The shock from the Iran war reversed that. Higher oil prices raised the cost of fuel, shipping, electricity, manufacturing, and food across the supply chain. That pushed inflation back up, which meant central banks could no longer keep cutting.
Recently, five central banks, the US, Eurozone, UK, Canada, and Japan, all held rates, citing the energy shock as the reason they stopped cutting.
Now, here is where Australia's decision changes the picture.
Last week, the RBA went further than holding. It raised rates for the third time this year.
The first raise in February was driven by domestic inflation that was already elevated before the war, from capacity pressures in the Australian economy.
The second in March and the third last week were driven by the energy shock compounding that existing problem.
The critical detail is what the RBA stated: it observed early signs that high energy costs are no longer just raising fuel prices in Australia, they are now feeding into wages, rents, and the prices of goods and services not directly linked to oil.
This process is called second-round effects. Here is how it works: when energy stays expensive for months, businesses that use fuel, electricity, or shipping face higher costs, so they raise their prices. Workers whose groceries, fuel, and utilities cost more demand higher wages. Those higher wages become a cost for employers, who raise prices again. This creates a cycle where inflation feeds on itself and persists even after the original energy shock fades.
The RBA cited these second-round effects as a reason for raising rates. It is among the first major central banks to act on this basis.
The vote was 8 to 1, a much wider margin than the 5 to 4 vote in March.
The RBA's baseline forecast assumes rates will reach 4.70% by end of 2026, but that forecast depends on oil falling back to $80 by year end, which requires the war to end and the Strait to reopen to all.
The RBA sees early signs of this process beginning in Australia. Governor Bullock said the current rate is now "a bit restrictive" and gives the RBA space to observe how the conflict plays out. But she warned that if this process deepens and becomes fully embedded in how businesses set prices and workers negotiate wages, even higher rates could be needed.
And Australia is likely not an outlier. It is just likely ahead of a sequence that other central banks are facing.
Two weeks ago, in the UK, the Bank of England's central scenario projected at least two rate increases over the coming year. In the Eurozone, the ECB's President Lagarde did not rule out a rate increase in June. In Japan, three members of the Central Bank voted for a raise. In the US, three members of the Fed wanted to remove language suggesting the next move would be a cut.
The difference is that Australia was already dealing with domestic inflation before the war, which put it further along in the sequence. The energy shock pushed it over the line.
If second-round effects appear in the UK, the eurozone, or Japan, those central banks will face the same choice.
Separately, on Friday, the US Bureau of Labor Statistics published its Nonfarm Payrolls report for April. It is a monthly count of how many jobs were added or lost in the US economy, and it is the single most watched indicator of the world's largest economy. 115,000 jobs were added, nearly double the 62,000 expected, with unemployment at 4.3% and wage growth at 3.6% year over year.
That said, the headline deserves some caution. The government revised February's job numbers down by another 23,000, continuing a pattern of downward revisions throughout 2026. The real picture is likely softer than 115,000 suggests.
But even with that caveat, the labor market is not collapsing, and that is what matters for the Fed's decision.
As a reminder, the Fed has two mandates from Congress: control inflation and support employment.
With the Fed's preferred inflation measure, headline PCE, at 3.5%, well above the 2% target, the inflation mandate says do not cut.
With employment holding steady, the employment mandate does not require action either.
Therefore, both mandates point in the same direction: keep rates where they are.
Because the Fed sets the cost of borrowing in dollars, and most international trade and debt is denominated in dollars, this keeps the global cost of capital elevated.
[WHAT IT MEANS FOR BUSINESS]
So, what does this mean for business?
The overall impact is negative, because for the first time in this cycle a central bank has moved from holding to raising rates in response to the energy shock, and the evidence from Australia suggests other central banks may follow.
In Australia, the impact is immediate: three raises in three months have brought rates back to the peak of the previous cycle, wiping out all the cuts from 2025. Variable-rate borrowers are already paying more, and the RBA's forecast points to 4.70% by year end, conditional on oil falling back to $80.
For businesses outside Australia, the RBA decision is a signal of what is likely coming. If second-round effects appear in the UK, the eurozone, or Japan, rate increases will follow.
The businesses hit hardest are those with variable-rate debt in any economy where rates are rising or likely to rise, because their financing costs increase immediately with each raise.
Energy-intensive businesses face a double pressure, because their input costs keep climbing from the energy shock while their financing costs rise from the rate response to it.
In Australia specifically, consumer-facing businesses will feel the squeeze as household spending comes under pressure from higher mortgage costs.
On the other side, businesses with fixed-rate debt locked in before the cycle turned are protected for the duration of those contracts.
Energy producers outside the Gulf continue to benefit from higher prices.
And businesses with strong cash positions that do not need to borrow are unaffected by rate increases and can use their financial strength while competitors are constrained.
[WHAT SHOULD BUSINESS LEADERS DO NOW]
So, what to do now?
The divide is between businesses that still carry variable-rate exposure and those that have already locked in fixed rates.
If you have variable-rate debt and have not converted to fixed, the urgency increased last week. The RBA has moved. Central banks in the UK and the Eurozone may follow. Once they raise, the fixed rates available will be higher than what you can lock in today.
If you are in Australia, stress-test your cash flow against 4.70% by year end.
If you are in the UK or the eurozone, stress-test against two to three raises over the coming year, which matches the UK's central scenario.
If you have strong cash, low leverage, or pricing power, the opportunity continues to grow: competitors under pressure from rising rates and rising input costs will slow investment, shed staff, and in some cases look to sell assets or divisions.
[OUTRO: AMINE LAOUEDJ, MANAGING DIRECTOR]
Thank you for listening to this episode of What It Means for Business. Have a good week.
Last week, the Reserve Bank of Australia announced its decision to raise its base interest rate from 4.10% to 4.35%, marking its third consecutive increase this year.
While other major central banks recently chose to hold rates, the RBA took action after observing early signs of second-round effects. The prolonged energy shock driven by disruptions in the Strait of Hormuz is no longer just raising fuel costs. It is now feeding into wages, rents, and unrelated goods and services. With the global expectation for cheaper borrowing costs now reversing, Australia's decision serves as a critical warning for what other major economies might face next.
Every week on the What It Means for Business podcast, Glenshore's Amine Laouedj cuts through the noise of global economic headlines to explain what is happening, why it matters, and what business leaders should do about it to adapt.
Also available on Spotify and Apple.
Date of production: 11 May 2026
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