Standard Chartered strategist Nicholas Chia now expects the Reserve Bank of Australia to raise the cash rate to 4.10% at the 17 March meeting, reversing a prior call for a hold. The bank still anticipates another hike in Q2, lifting its terminal rate forecast to 4.35%. Firm activity data and rising inflation expectations are seen driving RBA hawkishness.

Rising expectations push RBA hawkish

"Recent activity indicators remain firm and RBA messaging prior to the blackout period has leaned hawkish."

"But what moved the needle for us was the recent upshift in inflation expectations, which we think the RBA has very limited tolerance for. While part of it may be driven by the recent oil price shock, which the RBA may be inclined to look through, the central bank is likely to be wary of any signs of a de-anchoring of short-term inflation expectations."

"We now expect the Reserve Bank of Australia (RBA) to hike the cash rate to 4.10% at the 17 March meeting, having previously expected a rate hold. We see a high likelihood of a split decision by the RBA board, as hawks may prefer to tighten policy more quickly to keep the economy in better balance."

"We tentatively maintain our view for the RBA to raise the cash rate in Q2 to 4.35% (4.10% prior), likely at the May meeting, although we will watch for any visible signs of weakening economic activity from tighter financial conditions."

"We concede that the RBA rate decision on 17 March is likely to be a close call. The key risk to our view is if the RBA decides to hold the cash rate in March and await more economic data, such as quarterly core inflation."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)