Westpac, UBS now expect RBA rate hike after Hauser’s inflation warning
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The news: Westpac and UBS now expect the RBA to hike the cash rate next week after deputy governor Andrew Hauser said the central bank “even more decisively” confirmed the economy “has limited spare capacity” and could need to “act decisively” on inflation.
The context: Hauser said, in an interview with The Conversation’s Politics with Michelle Grattan Podcast released overnight, that the bank has data that confirms the Australian economy has limited spare capacity, which is creating inflationary pressure.
“If we fail to act decisively enough to prevent inflation staying high or even rising and expectations of inflation disanchor as they have not today in a long term sense,” Hauser said.
“But if we do see that disanchoring, it will be bad for everyone and it’s worth us continuously reminding ourselves just how toxic inflation is.”
UBS economists George Tharenou and Stephen Wu said in a note it has pulled forward expectations for a 25 basis point increase from May to March. The bank was already expecting 50 basis points worth of hikes by August 2026.
“The hawkish comments from RBA’s Hauser today suggest to us the staff’s recommendation to the RBA Board in March would be for a rate hike, on the basis of the recent data and likely upwards revisions to the inflation forecasts,” the UBS economists said.
Similarly, Westpac is now expecting the RBA to increase the cash rate by 25 basis points in both March and May, according to a note from chief economist Luci Ellis. This is up from a single hike in May.
Ellis noted that while the effect of “higher oil prices on headline inflation is large but temporary”, he monetary policy board will “nevertheless feel compelled to react, especially given the hit to confidence and financial markets has so far not been severe”.
“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,” Ellis 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. This is despite expectations having remain anchored in recent years in the face of more lasting shocks,” she said.
However, ANZ economists Aaron Luk and Adelaide Timbrell continue to expect the next interest rate hike to come in May 2026, after initially expecting a prolonged hold earlier in the year.
The ANZ economists made this decision on the basis of the lower than expected unemployment rate in December and January as well as “stickier than expected inflation”.
They also noted that the Middle East conflict “adds uncertainty to the economic outlook” but this “creates a difficult reaction function for the RBA” even if it signals alertness to higher inflation.
The sources: Westpac research, UBS research, RBA interview, ANZ research
