Interest rates: Markets price in March rate hike after RBA Deputy Governor Andrew Hauser warns on inflation
Benchmark cash rate futures traders lifted the chance of a cash rate hike next week to 61 per cent after RBA Deputy Governor Andrew Hauser spoke on Tuesday afternoon.
National Australia Bank now expects the Reserve Bank to lift interest rates on March 17 and in May in response to worries that the Middle East crisis and energy price shock will stoke inflation in Australia.
On Tuesday morning, NAB said it now expects the cash rate to peak at 4.35 per cent in May after the RBA delivers two 25 basis point increases from this week’s level of 3.85 per cent.
“The RBA may be required to engineer a deeper slowing in growth in order to ensure inflation returns to the target band in a reasonable timeframe,” said NAB’s chief economist Sally Auld.
Sign up to The Nightly's newsletters.
Get the first look at the digital newspaper, curated daily stories and breaking headlines delivered to your inbox.
By continuing you agree to our Terms and Privacy Policy.Benchmark interest rate futures traders also now expect a rate hike from the Reserve Bank on March 17 is more likely than not, after Deputy Governor Andrew Hauser hinted at the prospect in an interview yesterday afternoon.
Mr Hauser’s warnings that the Middle East war will push inflation significantly above 4 per cent and higher than the central bank’s current forecasts prompted overnight interest rate swap (OIS) traders to place the chances of a 25 basis point increase next week at 61 per cent.
The dollar also jumped after Mr Hauser’s speech as currency traders valued it higher versus other currencies thought to offer comparatively lower interest rates on cash.
On Wednesday morning, the dollar bought US71.2 cents after rallying 0.6 per cent in 12 hours, while it added 0.8 per cent against the British pound to buy £0.53 pence near its highest level since December 2023.
“The Aussie dollar is the top performer overnight with support coming from RBA deputy Governor Hauser where he presented a hawkish representation of recent labour market data and noted that inflation was “directionally higher” than the RBA’s February forecast,” said National Australia Bank.
UBS calls for March 17 hike
Late on Tuesday, the economics team at UBS also predicted the RBA will now lift rates to 4.1 per cent next week and said the market pricing for the increase moved up “materially” after Mr Hauser spoke.
“The hawkish comments from RBA’s Hauser today suggest to us the staff’s recommendation to the RBA Board in March would be for a rate hike, on the basis of the recent data and likely upwards revisions to the inflation forecasts. But we expect this recommendation to be thoroughly debated by the RBA Board and hence do not expect a unanimous vote to hike,” UBS economist George Theranou said.
However, not every economist is convinced the RBA will move next week, with the decision now considered a very close call between a lift or a hold. A potential decision to keep rates steady would allow the RBA to assess March quarter inflation data in late April, before potentially moving to lift at its May meeting.
“The market says it’s a roughly 60 per cent chance of a hike now,” said Wilson Asset Management strategist Damien Boey. “But we think it’s a line ball call for March. “If the RBA is inclined to hike more aggressively in response to Iranian inflation pressures, it will will have to take these hikes back more quickly in subsequent years. Indeed, rate hikes plus higher oil prices represent double tightening for the economy today, even before mentioning the uncertainty shock for the private sector.”
Before the Middle East war started on February 27 interest rate traders put the chances of a rate hike at just 9 per cent, but worries that Australian inflation will remain elevated and sticky without central bank action have pushed the market to bring forward rate hike expectations.
Last week, Bank of America economists also called for a rate hike on March 17 that would take benchmark borrowing rates to 4.1 per cent. The market currently has around 63 basis points of interest rate increases from the RBA in 2026 to take the cash rate to just shy of 4.5 per cent by the end of the year.
The RBA’s February forecasts delivered before the energy inflation shock of the Middle East war predicted the cash rate to climb to 4.2 per cent.
On March 9, the yield on the benchmark Australian government 10-year bond briefly hit 5 per cent at its highest level since June 2011 as bond traders demanded more compensation for their worries around more sticky inflation.
