Economists from two of Australia's "big four" banks now forecast that the Reserve Bank of Australia will raise interest rates for the second consecutive time next week, responding to persistent inflationary pressures.
Research reports released on Wednesday indicate that both National Australia Bank and Westpac expect the central bank to increase rates by 25 basis points to 4.1% at its upcoming meeting. Similar predictions have previously been issued by UBS and Deutsche Bank.
The shift in outlook follows remarks made on Tuesday by RBA Deputy Governor Andrew Hauser, who noted that the conflict in Iran has further intensified inflationary pressures, describing the situation as unfavorable.
If the RBA proceeds with the hike, it would mark the first instance of back-to-back rate increases in nearly three years. The Australian dollar rose 0.4% against the U.S. dollar on Wednesday, reaching 0.7147. Money market pricing now suggests approximately a three-in-four chance of a rate hike on March 17, up from around one-in-three earlier on Tuesday.
The strengthening expectations for monetary tightening have also helped the Australian dollar partially withstand market volatility spurred by the conflict in Iran. So far this year, the Australian dollar has appreciated more than 7% against the U.S. dollar, making it the best-performing major currency.
Sally Auld, Chief Economist at National Australia Bank, stated that given Australia's "relatively unfavorable" starting point for inflation and recent data showing economic growth significantly above trend levels, the case for near-term rate hikes is "clear." She anticipates a potential third rate increase in May.
Luci Ellis, Chief Economist at Westpac, explained that the central bank's view that demand continues to outstrip the economy's productive capacity, combined with its willingness to act if overall inflation sees a short-term spike to prevent a sustained rise in inflation expectations, led her to revise her earlier assessment.
Ellis, a former Assistant Governor at the RBA, added, "There may be a divided opinion at next week's policy meeting, and market participants should also consider the possibility that the bank may opt to wait until May to act—though that is no longer our baseline forecast."
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