The RBA's Monetary Policy Board meets today with its rates decision due at 1430 Sydney time. Consensus has aligned around a 25bps hike in the cash rate to 4.1%, with market pricing (around 70%) and most institutions shifting their view to a hike last week, with a further hike in May also expected. The shift comes with the oil price shock stemming from the Middle East conflict set to add to the already elevated inflation pressures in Australia. My view is that the RBA will defy those expectations, leaving the cash rate on hold at 3.85% amid uncertainty over the global backdrop - but it will be a hawkish hold ahead of a likely hike in May.
In February, the RBA hiked the cash rate by 25bps to 3.85%, reversing one of the three rate cuts from 2025 after updated forecasts showed inflation was expected to rise further above the 2-3% target band. While some of the contributory factors to the inflation overshoot are seen as temporary, it was also linked to capacity pressures in the domestic economy from strong demand and a robust labour market. After the February meeting, markets responded by adding a further rate hike into the profile in 2026, pricing in a total of 50bps of additional tightening by year-end. Markets, however, only assigned a low probability (10-20%) to a follow-up hike in March.
That market pricing subsequently held firm for weeks, despite multiple speeches from senior RBA officials - and remarks from Governor Bullock that all meetings were 'live' - as well as upside surprises in the incoming data for GDP growth (0.8q/q, 2.6%Y/Y), unemployment (4.1%) and CPI (3.8%yr). The shift in rate-hike expectations only came last week, with markets reacting to of all things an appearance by Deputy Governor Hauser on The Conversation podcast (Politics with Michelle Grattan). Markets seemed to key off Hauser's fairly straightforward remarks that higher oil prices were likely to push the inflation outlook above its February forecasts.
Markets latched onto this hawkish angle; however, Hauser's comments were more nuanced - he highlighted that growth would be impacted by increased geopolitical uncertainty, and that higher petrol prices would effectively act as a tax on domestic output and consumption. Hauser said there were risks around tightening into this outlook, and that RBA staff were working through a full range of scenarios ahead of the next forecast update in May.
Make no mistake: the RBA could hike today. As I noted in some of my articles in recent weeks, a March hike was an underpriced risk - there was already a case for back-to-back hikes given the RBA's view on inflation. What I find surprising is that markets reacted so sharply to the Hauser podcast (only one voice of a 9-member board), especially given Governor Bullock has emphasised the collective nature of how the newly formed Monetary Policy Board will operate, avoiding pre-meeting guidance of any sort. It's also worth noting the Board composition has changed since February, with Bruce Preston replacing Alison Watkins following the end of her more than 5-year tenure.
With all the uncertainties in mind - most notably around the effects of the oil price shock, putting upside pressure on inflation but downside pressure on growth - I expect the RBA to err on the side of caution and hold steady at 3.85% today. But it would be a clear hawkish hold, reaffirming that a more restrictive stance will likely be required as the year progresses to address the domestic inflationary pressures it is seeing. Either way this shapes as a very interesting meeting: a hold would potentially come across as a dovish surprise while a hike would align with consensus but still leave the additional tightening priced in subject to the events in the Middle East and the incoming data.