This story has been updated from its original version.
Major banks are bracing for interest rate hikes next week.
Westpac, National Australia Bank's (NAB), Commonwealth Bank of Australia (CBA) and now ANZ have all updated their forecasts and are now expecting the Reserve Bank of Australia (RBA) to raise interest rates at its meeting later this month, following Deputy Governor Andrew Hauser's remarks on inflation.
On Monday, Hauser spoke on The Conversation’s Politics with Michelle Grattan podcast, saying that inflation is running hotter than expected thanks to the war in the Middle East that is raising oil prices globally. In February, the RBA forecasted inflation would hit 4.2%. But with recent events, Hauser said inflation could go higher.
"It clearly is the case that [the conflict in the Middle East] is an upside risk to that projection in February," Hauser said. "It's still in flux."
The central bank meets next Monday and Tuesday, the 16 and 17 of March, to discuss monetary policy. Market players have long been anticipating further rate hikes after the RBA raised rates by 25 basis points in February, citing ongoing inflation as the driver, and bringing the official cash rate (OCR) to 3.85%.
Markets had expected the RBA to pause before a possible move in May. But rising inflation pressures, fuelled in part by geopolitical tensions, have shifted expectations toward a near-term hike.
"The March board meeting is being set in a very different context to what was expected just two weeks ago," Belinda Allen, head of Australian economics at CBA, wrote in a note. "The war in the Middle East has set an uncertain backdrop to the meeting.
"What does a central bank do in this environment?" Allen continued. "There are arguments that can be made in being cautious and waiting to see how the situation evolves in the Middle East. Certainly, we took this view early last week. But the near-term inflation outlook, we expect, will carry weight given the current state of capacity pressures in Australia and recent commentary from the RBA has focused on inflation.
"We view the balance of probabilities have shifted given recent commentary and we now expect the RBA to hike the cash rate in March and May," she added.
Then on Thursday, ANZ, the last of the four majors to update its forecast, said it now expects the RBA to raise rates this month.
"The clearest and most immediate impact of the Middle East conflict on Australia is higher inflation," economists at ANZ wrote in a note. "The increased inflation risks will exacerbate those inflation concerns, creating more urgency to move quickly to contain inflation expectations.
"Beyond the March meeting, we still expect an additional 25 [basis points] hike in May," the economists added.
Meanwhile, inflationary pressures keep mounting in Australia. January's headline CPI print was 3.8%, the same as December, while trimmed mean inflation edged up to 3.4%, from 3.3% the month earlier. That's on top of increases in both headline CPI and trimmed mean inflation in December's print. The RBA has said it will not cut rates again until inflation is back within the 2% to 3% target inflation range.
