CBA rates call: RBA expected to lift rates in March and May as Iran conflict boosts inflation risk

The Reserve Bank of Australia (RBA) is expected to lift interest rates at its March meeting and again in May, as inflation remains stubborn and the economy continues to run strongly.

CommBank economists now expect two 25 basis point rate rises, which would take the cash rate to 4.35%.

“The debate at the March meeting will be a close one,” Commonwealth Bank Head of Australian economics Belinda Allen said. “But with inflation still above target and the economy running above trend, we expect the Board will choose to lift rates again and follow up with another move in May.”

The outlook has shifted following a rapid change in the global environment. The escalation of conflict in the Middle East has increased uncertainty and raised the risk of higher energy prices, which could add to inflation pressures. At the same time, the conflict poses risks to global growth.

Despite this uncertainty, conditions at home remain firm.

Economy still running strongly

Allen said inflation remains the RBA’s central concern.

“While global uncertainty has increased, the domestic economy is still proving resilient. Inflation remains too high and the labour market is tight, which keeps pressure on the Reserve Bank to act,” she said.

CommBank economists expect underlying inflation to remain high in the first half of the year, broadly in line with the RBA’s most recent forecasts.

A close call in March

The March decision is likely to be finely balanced.

There are arguments for waiting until May, particularly given the heightened global uncertainty and the fact that previous rate increases are still working their way through the economy.

Financial markets are already pricing in a meaningful chance of a March rate rise.

Focus remains on inflation

On balance, CommBank economists expect the RBA to prioritise inflation control.

“With inflation still well above target, the RBA is likely to err on the side of tightening,” Allen said.