Oil Shock Puts Two RBA Hikes Back on the Table

Why Rate Hike Bets Just Jumped

Australia’s major banks and economists are rapidly repricing their interest rate expectations, with NAB and Westpac now forecasting two rate hikes in March and May. If that plays out, the official cash rate would rise from 3.85% to 4.35%.

The main driver behind this shift is the sharp rise in oil prices, which is expected to flow through to near-term inflation and put added pressure on household spending. When oil prices surge, it tends to feed directly into CPI, and that creates a real risk that the next inflation print comes in hotter than expected.

Australia’s domestic backdrop was already inflationary even before the conflict escalated. Q4 GDP growth came in at a stronger-than-expected 2.6%, unemployment remains low, and inflation was already proving sticky. In other words, the economy was already showing the kind of conditions that could justify further tightening even without an external oil shock.

The most immediate catalyst for markets, though, has been the tone from the RBA itself. Governor Michele Bullock and Deputy Governor Andrew Hauser have both delivered unusually direct hawkish commentary, signalling that the March meeting is very much live for a rate rise. For us, that is what has pushed the market to take the risk of another hike far more seriously.

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Hawkish RBA Talk

The shift in expectations hit financial markets immediately. The Australian dollar surged to US71.70 cents, its highest level in more than three years. Bond markets also moved sharply, with the three-year yield rising to 4.49% and the 10-year benchmark climbing to 4.88%.

Money markets have now moved aggressively to price in a higher chance of further tightening. The probability of a March rate hike has jumped to 77%, up from just 39% before Hauser’s comments, which shows how quickly the market has repriced the RBA’s policy path.