May meeting, RBA set for third straight hike as Hormuz closure drives inflation surge
The Reserve Bank of Australia (RBA) is set to deliver its third consecutive rate hike on May 5, raising the cash rate by 25 basis points to 4.35%, driven by persistent inflation pressures exacerbated by the closure of the Strait of Hormuz. Per the full note source, a recent Reuters poll indicates that over a third of economists now expect rates to exceed 4.60% by year-end, a significant shift from previous forecasts. This adjustment reflects heightened concerns over core inflation, which is now forecast to average 3.8% this year, up from 3.1% prior to the geopolitical tensions. The RBA's cautious stance is informed by its recent experience with inflation rebounding swiftly after rate cuts in 2025, prompting a more aggressive approach to monetary policy.
What the desk is arguing
The desk argues that the RBA's upcoming rate hike is a necessary response to escalating inflation driven by external shocks, particularly the energy crisis linked to the Strait of Hormuz closure. The consensus among economists, as reported in the Reuters poll, indicates a strong expectation for the RBA to raise rates to 4.35%, with a notable shift in terminal rate expectations beyond May.
Supporting this view, the latest CPI data shows annual inflation rising to 4.1% from 3.6%, with core inflation also edging higher. The RBA's historical context, particularly its experience in 2025, suggests a heightened sensitivity to inflation expectations, making it unlikely to signal any pause in rate hikes soon.
Where it sits in our coverage
Our consensus target for the AUD/USD is 1.075, with a range from 1.04 to 1.12. Major banks have varying forecasts, with jpmorgan targeting 1.10 for March 2026, while bofa has a more conservative target of 1.04 for the same tenor.
This view aligns with the broader market sentiment, though it sits at the upper end of the expected range, reflecting a more aggressive outlook on RBA policy compared to some firms that anticipate a peak at 4.35%.
How other firms see it
Aligned firms such as jpmorgan and citi share a similar outlook on the RBA's trajectory, anticipating continued rate hikes. In contrast, bofa and anz are more cautious, projecting a peak rate of 4.35% or lower.
Watch the AUD/USD closely, as its movements will likely reflect shifts in expectations surrounding RBA policy and inflation dynamics. The trajectory of Australian inflation data will also be critical in shaping market sentiment.
What the calendar says
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Reuters poll: RBA to hike 25bps to 4.35% on May 5, say 30 of 33 economists. Over a third now see rates at 4.60%+ by year-end vs none in March. Strait of Hormuz closure keeps oil above $100; CPI at 4.1%.
Summary: A Reuters poll of 33 economists conducted April 27 to 30 found 30 expect the RBA to raise its cash rate by 25 basis points to 4.35% at its May 5 meeting, a third consecutive increase More than a third of forecasters now see rates reaching 4.60% or higher by the end of 2026, compared with none in the March poll, representing a significant shift in the distribution of terminal rate expectations in just one month The RBA has been raising rates since early February 2026, with inflation having remained above its 2% to 3% target since mid-2025 Annual CPI rose to 4.1% in the most recent quarter from 3.6%, partly reflecting higher fuel prices; core CPI edged up to 3.5% from 3.4% The Strait of Hormuz closure, a route through which roughly a fifth of global oil supply passes, has kept crude prices mostly above $100 a barrel, with oil briefly trading above $126 this week Economists note that even if the Strait reopened immediately, trimmed mean inflation is expected to spike in the second quarter as the energy shock feeds through to core price measures The RBA's experience in 2025, when underlying inflation rebounded almost immediately after it cut rates, is seen as having shifted the board's risk tolerance toward maintaining higher rates for longer A majority of economists, 18 of 31, still expect the cash rate to hold at 4.35% through year-end, but that majority has narrowed sharply Among the major banks, ANZ, CBA and NAB expect rates to peak at 4.35%, while Westpac forecasts a higher peak of 4.85% Inflation is expected to average 3.8% this year, up from a pre-war forecast of 3.1%, while the median GDP growth forecast remains unchanged at 2.2% Entrenched inflation expectations are flagged as the primary risk, with economists warning that a failure to act decisively could embed higher expectations that become significantly harder to reverse The Reserve Bank of Australia is on course to deliver its third consecutive interest rate increase on May 5, taking the cash rate to 4.35% and fully reversing the cuts made last year, as the closure of the Strait of Hormuz keeps oil prices elevated and Australia's inflation problem proves more persistent than policymakers had hoped. Thirty of 33 economists surveyed by Reuters between April 27 and 30 expect the 25 basis point move, a near-unanimous view that reflects both the strength of the incoming inflation data and the RBA's own recent history. The central bank began tightening in early February after CPI remained above its 2% to 3% target throughout the second half of 2025.
The most recent quarterly figures showed annual inflation accelerating to 4.1% from 3.6%, with core CPI also edging higher to 3.5% from 3.4%, suggesting the energy shock is beginning to spread beyond headline prices. The Strait of Hormuz is the defining variable. The closure of the waterway, through which approximately a fifth of global oil supply passes, has kept crude prices mostly above $100 a barrel, with prices briefly spiking above $126 this week.
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