It wasn't long ago that the Reserve Bank of Australia (RBA) decided to increase the cash rate by 25 basis points (0.25%). Now experts are expecting the RBA interest rate to go up again this month because inflation is stronger and the outlook has changed.
Experts at investment bank UBS have looked at the situation and think that another interest rate increase looks very likely this year. In-fact, UBS has brought forward when it thinks that hike is going to happen, changing its rate hike prediction to this month (rather than May).
For starters, UBS pointed to RBA Deputy Governor Andrew Hauser's interview with The Conversation's Politics with Michelle Grattan podcast.
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RBA Deputy Governor's hawkish comments
UBS said Hauser's comments to the podcast came just before the 'blackout period' for the March 2026 meeting and the commentary was "hawkish".
The experts suggested that these comments can be viewed as a "signal", along with analysis that inflation is coming in stronger than expected. UBS highlighted the following words from the commentary:
Our projection in February before the Iran attacks was for inflation only to return to the midpoint of the target on the assumption, the technical assumption, that the cash rate did pick up a little bit further from where it is now… We've had some data that seem to have confirmed even more decisively than we had before, that our economy currently has limited spare capacity.
Unemployment came in a bit below expectations. Job adverts and other measures of demand for labour were a little higher. GDP growth came in at 2.6 per cent … but it's rather bigger than our 2 per cent estimate of the capacity of the sustainable rate of growth in the economy. Inflation was in line in January with our expectations … [but] that's well above our target range. So against that backdrop … further increases of prices from Iran, if that is what we end up seeing, and that is a big if, is not a helpful development from the perspective of our policy discussion.
Inflation, GDP and unemployment remain strong
UBS has pointed out in recent commentary that data flow showed CPI inflation, GDP and unemployment was stronger than expected and "warranted further (and earlier) increases in the cash rate".
But, weak consumer data made UBS think the RBA would wait until May.
Hauser's comments seemed to downplay the 'miss' of expectations about consumer spending, while UBS had expected the RBA to place a substantial weight on that aspect.
The rise in the oil/petrol price has led to UBS increasing its CPI inflation forecasts. The broker is now forecasting that the inflation for the first quarter of 2026 will be 1.3% quarter-over-quarter and 4.1% year-over-year. There's potential for the inflation to be even stronger if the oil price shock is prolonged.
UBS said this is worrying for consumer inflation expectations that had already been trending higher for months.
The broker thinks the RBA will look to act early by hiking in March 2026 to "shore against this risk".
Could more RBA interest rate hikes happen?
UBS said it had already been expecting a further 50 basis points of rate hikes by the RBA by August 2026.
The broker said it doesn't think there will be unanimous vote to hike in March, and looking ahead, it will review its RBA profile of the timing, and terminal rate forecasts, after the RBA's March meeting.
Time will tell what happens with interest rates, but UBS and one of the RBA's officials are not liking what they see with regards to inflation. It will be interesting to see how this impacts the net interest margin (NIM) of big banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), ANZ Group Holdings Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB)
