RBA set to hike to 4.35% today. NAB sees cash rate peaking near 4.6%.
The Reserve Bank of Australia (RBA) is poised to increase its cash rate by 25 basis points to 4.35%, with National Australia Bank (NAB) projecting a terminal rate of approximately 4.6% due to persistent energy-driven inflation and robust domestic growth. Per the full note source, this hike would effectively reverse the easing cycle initiated in 2025, reflecting the RBA's commitment to addressing inflation pressures that have intensified amid geopolitical tensions. The upcoming Statement on Monetary Policy (SOMP) is expected to revise growth forecasts downward while raising inflation expectations, indicating a complex economic landscape ahead.
What the desk is arguing
The desk posits that the RBA's anticipated rate hike is a necessary response to escalating inflationary pressures, particularly from energy prices, which have complicated the central bank's policy options. Per the full note source, the Q1 trimmed-mean inflation rate of 3.5% year-on-year underscores the urgency for the RBA to act, as this figure exceeds the bank's target range of 2% to 3%.
NAB's analysis highlights that the combination of above-potential growth and a labor market operating near capacity leaves little room for the RBA to treat the current inflation shock as transitory. The expected upward revision of the terminal rate to around 4.6% signals a significant shift in monetary policy outlook that could impact various sectors, including housing and consumer spending.
Where it sits in our coverage
Our consensus target for the Australian dollar is 1.075, with a range from 1.04 to 1.12. Key firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan and citi, which anticipate a tightening trajectory, while bofa remains more cautious, suggesting a lower target. The desk's call is positioned at the upper end of the consensus range, reflecting a more aggressive outlook on rate hikes.
How other firms see it
Firms such as citi and jpmorgan are aligned with the desk's view, expecting further tightening from the RBA in response to inflationary pressures. Conversely, bofa holds a contrary stance, predicting a more tempered approach to rate hikes.
The trajectory of the AUD/USD pair will be closely linked to the RBA's decisions, as well as broader market reactions to inflation data and geopolitical developments affecting energy prices.
What the calendar says
With the RBA's rate decision scheduled for today, the market is keenly awaiting the accompanying SOMP, which will provide updated economic forecasts. This event is critical as it will shape expectations for future monetary policy and influence market positioning significantly.
National Australia Bank expects the RBA to hike 25bp to 4.35% on Tuesday, with updated forecasts likely to show a terminal rate of around 4.6% as energy-driven inflation and above-potential growth limit the bank's options. Earlier: CBA tips RBA rate hike tomorrow but warns Iran war makes it a close call. Split RBA board May meeting, RBA set for third straight hike as Hormuz closure drives inflation surge Newsquawk Week Ahead: US NFP, ISM Services PMI, RBA, Canadian jobs and OPEC+ Decision is due at 2.30pm Sydney time (0430 GMT/ 0030 US Eastern time) Summary: National Australia Bank expects the Reserve Bank of Australia to raise its cash rate by 25 basis points to 4.35% at its Tuesday meeting, returning the rate to its level before the cuts delivered through 2025, per the NAB note NAB cited above-potential domestic growth, a labour market operating near capacity and re-emerging inflation pressures as conditions that already justified tightening before the Middle East conflict escalated, according to the note First-quarter trimmed-mean inflation came in at 3.5% year on year, leaving the RBA with limited room to treat the energy price shock as temporary and look through its inflationary impact The RBA's updated Statement on Monetary Policy is expected to show downward revisions to near-term growth and upward revisions to inflation, with unemployment forecasts little changed in the near term but revised higher further out, according to NAB The cash rate assumption underlying the new SOMP forecasts is likely to peak at around 4.6%, up from the 4.3% peak embedded in the February SOMP The Reserve Bank of Australia is widely expected to raise its cash rate by 25 basis points to 4.35% at its Tuesday meeting, according to National Australia Bank, with updated forecasts set to accompany the decision that point to a higher terminal rate than previously projected as energy-driven inflation narrows the central bank's room to manoeuvre.
The move, if delivered as NAB anticipates, would return the cash rate to the level that prevailed before the RBA began cutting through 2025, effectively unwinding that easing cycle in its entirety. NAB argues that the domestic case for tightening was already established before the Middle East conflict intensified. Growth was running above potential, the labour market was operating near capacity and inflation pressures had begun to re-emerge.
The energy price shock has since added a further inflationary layer, lifting both actual inflation and near-term expectations in a way the RBA cannot easily dismiss. The Q1 trimmed-mean inflation print of 3.5% year on year is central to that assessment. Trimmed-mean is the RBA's preferred measure of underlying inflation, and a reading at that level sits materially above the bank's 2% to 3% target band.
With core inflation already elevated before the full impact of higher energy costs has passed through the economy, NAB argues the RBA has limited scope to treat the current shock as transitory and hold rates steady. Alongside the rate decision, the RBA will release its quarterly Statement on Monetary Policy containing an updated set of economic forecasts, and NAB expects those projections to reflect the changed environment explicitly. Near-term growth forecasts are likely to be revised down, acknowledging the drag from higher energy costs and tighter financial conditions, while inflation forecasts are expected to move higher.
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