The Reserve Bank of Australia is broadly forecast to raise its policy rate by 25 basis points at the close of its two-day meeting on March 17, lifting the cash rate to 4.10% and returning borrowing costs to a one-year high. That expected move would follow a 25 basis-point increase implemented in February.
Investors and economists point to recent inflation readings as the chief reason underpinning bets on another hike. Consumer inflation has been trending back above the RBA's 2% to 3% annual target range, prompting concern among policymakers that price pressures are re-accelerating.
All four of Australia's largest banks currently expect the RBA to raise rates in March, with most also penciling in a follow-up 25 basis-point increase in May. Overheated inflation is cited as the central motive for further tightening, particularly given evidence that domestic demand and the labour market are running strongly and placing additional upward pressure on prices.
Heightened uncertainty stemming from the U.S.-Israel war on Iran has also contributed to market expectations for pre-emptive monetary tightening. Analysts and market participants have flagged rising oil prices and disruptions in energy markets linked to the conflict as additional inflationary risks, and Australia’s heavy reliance on oil imports has been singled out as a channel through which those global pressures could feed into domestic inflation.
However, the decision at this month's meeting is not expected to be unanimous or straightforward. Some policymakers remain inclined to adopt a wait-and-see stance on inflation data, meaning the policy committee’s deliberations could be closely contested.
"The debate at the March meeting will be a close one," Commonwealth Bank Head of Australian economics Belinda Allen said. "But with inflation still above target and the economy running above trend, we expect the Board will choose to lift rates again and follow up with another move in May."
Analysts at NAB argued that, given the backdrop of elevated inflation and robust domestic activity, the RBA is likely to show little tolerance for further upside surprises in prices while displaying relatively more willingness to accept softer growth outcomes. "This means that the policy of least regret is to hike in March," NAB analysts said.
Market pricing implies a terminal rate for this tightening cycle at around 4.35%, a level at which the RBA is expected to pause and assess the impact of its recent moves. Under that scenario, a 25 basis-point rise in May would take the cash rate back to levels seen in 2024, before a brief easing episode in 2025.
Market and sector implications
Australian equities have tended to react negatively to hawkish comments from the RBA because higher interest rates generally reduce liquidity and raise discount rates used to value assets. Nevertheless, any immediate declines in the benchmark S&P/ASX 200 are expected to be contained, in part because higher rates often bolster the net interest margins and profitability of the country's largest banks.
The ASX 200 reached several record highs following the RBA's February increase, but the index moved sharply lower in March amid the escalation of the Iran conflict. Market participants will be watching the RBA's statement and subsequent commentary for clues on whether tightening will be repeated and how that might influence sectors such as financials and cyclical assets.
The Australian dollar has responded positively to the RBA's tightening cycle. The AUD/USD pair rose to a four-year high after hawkish rhetoric from the central bank, and further rate increases are expected to lend additional support to the currency. As Westpac analysts noted, "Given the far from unanimous pricing for this week’s RBA meeting, a rate hike with similarly hawkish rhetoric could spur further upside for the Aussie dollar."
What to watch at the meeting
- Governor and Board commentary: The tone of the RBA's statement will be scrutinised for how hawkish the committee remains after another quarter-point hike.
- Inflation trajectory: Whether recent readings that show inflation above the 2% to 3% target range are judged to be persistent or transitional will be central to the Bank's path.
- Energy-market risks: Any explicit references to oil-price and energy-market disruptions tied to the U.S.-Israel war on Iran will be taken as an acknowledgement of external upside risks to Australian inflation.
Investors and market participants will parse the RBA's decision and accompanying language for signals on the likelihood of further tightening in May and beyond, as well as how long the Bank expects to hold rates near the projected terminal level.