RBA interest rates: Borrowers warned another Reserve Bank hike could be just three months away

Aussie borrowers have been told to brace for another interest rate hike as soon as May, with a flurry of experts warning the Reserve Bank will take an aggressive approach to stopping inflation.

The RBA lifted the official cash rate from 3.6 per cent to 3.85 per cent on Tuesday — marking a sharp reversal of policy since the last cut just six months ago.

It also released fresh price forecasts showing inflation would remain above the 2 to 3 per cent target band until mid-2027 — more than five years after the post-pandemic cost-of-living crisis started.

Investment houses UBS and Bank of America both brought forward their timeline for the next rate hike to May.

“The RBA’s updated forecasts show inflation persistently above target while the labour market remains tight,” BoA economist Nick Stenner said.

Those projections were assuming almost two further rate rises by the end of next year, he said.

“We expect cyclical pressures and high unit labour costs will keep underlying inflation persistently above-target in 2026, supporting the case for further tightening,” Mr Stenner said.

UBS had previously tipped a rate rise by August. George Tharenou said the trade-off between economic growth and inflation had worsened in the RBA’s latest forecasts.

That means Australia’s economy will struggle to expand without overheating and leading to price pressure.

“This largely reflects the reality of an economy with productivity growth which has been nearly flat for almost a decade,” he said.

Commonwealth Bank’s Belinda Allen on Tuesday said a May rate rise was a line-ball call but likely; while Westpac’s Luci Ellis — generally more dovish than most analysts and favouring lower rates — also expected a move in May.

“Things have changed. Inflation is higher,” Ms Ellis said on Wednesday.

“Our assessment of (the RBA’s) forecasts is they are priming themselves to raise rates in May.

“It’s not a comfortable position for the RBA. We can be reasonably confident that another rate hike, probably in May, is on the cards.”

Ms Ellis pointed to the rapid rise in Australia’s exchange rate, up about US10¢ since last April, as helping to alleviate some of the inflation pressure.

A higher dollar will make imports including cars, petrol, clothes and electronics a little cheaper.

Financial markets judged an 80 per cent chance of a May move. A hike by August was considered certain.

Yet some economists believe the RBA has done enough.

AMP’s Shane Oliver expected the central bank would hold for the remainder of the year, though there was the risk of a rise.

“The RBA remains cautious and has left the door wide open for further hikes . . . we lean a bit more optimistic and expect this to be a case of one and done,” he said.

Dr Oliver said monthly core inflation was trending lower and price bumps in other countries last year had proved temporary.

“Consumer spending is likely to take a hit as we have swung quickly from rate cuts to hikes (and) mortgage stress likely remains high,” he said.

“For someone with a $660,000 average new mortgage this will mean roughly an extra $110 in interest payments a month or an extra $1300 a year.

“This will likely dent consumer confidence and spending, particularly as expectations will now be for more hikes.”