Overview of Expected Rate Hikes#
Westpac economists have forecast that the Reserve Bank of Australia (RBA) will raise interest rates by 25 basis points, or 0.25%, during its March meeting. They anticipate another increase in May, which would bring the peak cash rate to approximately 4.35%. This marks a shift from their previous expectation of a single rate hike in May.
Reasons Behind the Rate Increases#
The anticipated rate hikes are influenced by a recent surge in oil prices, which could lead to a temporary rise in headline inflation. Headline inflation refers to the total inflation within an economy, including all goods and services. Westpac's chief economist, Luci Ellis, noted that while the impact of higher oil prices on inflation is significant, it is expected to be short-lived. However, the RBA may feel pressured to act to keep inflation expectations in check.
RBA's Concerns and Market Conditions#
Westpac's revised outlook also reflects the RBA's ongoing concerns about weak growth in supply capacity. Despite some indicators showing more moderate inflation pressures, the central bank is cautious. The RBA's monetary policy board is likely to respond to these economic signals, especially since the current impact on market confidence has not been severe.
Potential for Delayed Action#
While a rate increase in March is now considered the base case, Westpac acknowledges that the RBA could choose to delay its decision until May. This could happen if market conditions worsen or if oil prices experience a significant decline. The RBA's decisions will depend on how these factors evolve in the coming months.