Two of Australia’s biggest banks have shifted their calls on the Reserve Bank’s next move, now tipping an earlier and steeper tightening path.
Major lenders National Australia Bank (NAB) and Westpac have revised their cash rate forecasts ahead of the Reserve Bank of Australia’s (RBA) March rate decision next Tuesday, with both lenders now suggesting the central bank will lift rates by 25 basis points and follow up with another hike in May – taking it to a new peak of 4.35 per cent.
NAB swings to March and May hikes
In a significant revision to its outlook, NAB has moved from expecting a single hike in May to predicting back‑to‑back increases over the next two meetings.
“We now expect the RBA to deliver a 25bp increase to the cash rate at the March meeting, followed by another increase in May, taking the cash rate to a peak of 4.35 per cent,” NAB said.
The bank noted how sharp the change was compared with its earlier stance, stressing that it had previously viewed a second hike as a risk case.
“We previously expected the RBA to hike to 4.1 per cent in May, with the risk skewed to an additional increase. We see the risks as more balanced around our new baseline forecast for policy rates at 4.35 per cent in May,” it said.
NAB set out four main reasons for the shift, including a clear change in tone from the RBA’s leadership in recent days following the military conflict in the Middle East and the ensuing spike in oil prices.
“First, in our view, the combination of hawkish commentary from both the Governor and Deputy Governor over the past week contains more signal than noise. It is clear from their commentary that senior RBA officials are inclined to view the Iranian conflict as an inflationary shock,” NAB said.
The bank argued that even before the Iran conflict intensified, the RBA was already grappling with an economy which was running too hot.
It pointed to inflation sitting above the 2–3 per cent band, growth running stronger than the RBA’s estimate of trend and a tight market.
Against that backdrop, NAB said the central bank would have limited patience for any additional upside surprises on prices and a greater willingness to accept slower growth.
“This means that the policy of least regret is to hike in March,” the bank said.
NAB referenced the RBA’s own published projections and noted that the February Statement on Monetary Policy signalled more hikes to return inflation to target levels.
“The RBA’s February forecasts implied that should the economy progress as forecast, the RBA would need to deliver ~65bps of hikes,” NAB said.
The bank further highlighted the recent jump in short‑term inflation expectations which have moved higher alongside petrol prices.
Weekly consumer inflation expectations jumped to 6.1 per cent on Tuesday, reaching their steepest point since November 2022.
“This is likely to be causing some anxiety at the RBA, given the importance of central bank credibility,” NAB wrote.
NAB also set out its concern that pausing for too long could leave monetary policy settings misaligned with the economic backdrop.
It warned that if inflation peaked higher and took longer to fall back inside the band, then leaving the cash rate unchanged in March would keep real interest rates too low per what is needed to cool demand.
“Not hiking in March means that the RBA runs the risk of a longer period in which broader rate settings are not appropriate for economic fundamentals,” it added.
Looking further ahead, NAB said the RBA would ease the cash rate after an extended period at a higher peak.
“We continue to expect gradual easing back towards more neutral levels from H2 2027,” it said.
Westpac joins call for double hike
Westpac has moved in lockstep with NAB, revising its call to a pair of 25 basis point hikes in March and May.
The bank previously expected a single hike in May, yet now believes the RBA will likely act at both of its next two meetings.
“We revise our view of RBA policy: 25bp hikes in both March and May expected. Single hike still possible but not our base case,” Westpac chief economist Luci Ellis said.
Under the new profile, Westpac now sees the cash rate topping out at 4.35 per cent, matching NAB’s forecast.
Westpac said the direct impact of higher oil prices on headline inflation would fade over time, but argued that the RBA would still feel obliged to respond to the latest surge.
“The RBA Monetary Policy Board will nevertheless feel compelled to react, especially given the hit to confidence and financial markets has so far not been severe,” Ellis said.
Ellis also pointed to recent messaging from the central bank, including commentary around supply capacity and the RBA viewing inflation expectations as a crucial metric.
“Key information shifting our view is RBA communication revealing it has not changed its pessimistic view of growth in supply capacity following the national accounts, even though data revisions, consumption and unit labour costs paint a more benign picture,” she said
“In addition, it has signalled a willingness to respond to the spike in headline inflation to head off a sustained rise in inflation expectations,” Westpac said.
Yet Ellis reiterated that the arguments for waiting until May had not dissipated entirely, particularly given the risk of overreacting to a potentially temporary supply shock.
Beyond the near term, Westpac expects the higher peak to set up an extended period of restrictive policy before rates can begin to fall.
Ellis anticipated that by the end of next year underlying inflation would be close to the 2.5 per cent midpoint and joblessness “noticeably higher.”
On that basis, the bank pushed back its expected start date for easing.
“We therefore also shift our expectations of the necessary reversal of tight policy, to Nov and Dec 2027 and Feb 2028,” Ellis said.
Commonwealth Bank currently is predicting a single rate rise in May, while ANZ revised its call of an extended hold in late February to a May hike.
[Related: Majors brace for May hike after stubborn CPI result]
