RBA should delay rate hike until May, says AMP

Economists and the money market have predicted that the Reserve Bank of Australia will raise rates today following recent jobs data, GDP growth figures, rising energy prices and the RBA's hawkish commentary in recent weeks.

AMP chief economist Shane Oliver is expecting a 0.25 per cent hike in the cash rate today, which would lift the cash rate target to 4.1 per cent.

Cash rate futures have priced in a 71 per cent probability of a 25 basis-point increase as of 13 March.

"We expect that the RBA will raise rates again at its March meeting reflecting concerns about a further boost to inflation and inflation expectations as a result of higher energy prices flowing from the US/Israel war with Iran at a time when inflation is already above target," Oliver said.

He added that while the RBA would likely raise rates today, it should consider leaving them on hold given recent uncertainty in the economy.

He noted that trimmed mean inflation had continued to fall faster than what the RBA was forecasting and that recent data on consumer spending had been softer than expected, with the CBA’s household spending indicator even falling in February.

"Surging petrol prices will [also] act as a dampener on consumer spending and it makes sense to wait for at least some of the dust to settle from the Iran war because it could end in a month making any boost to inflation from higher petrol prices a short term blip," he said.

"So we think it makes more sense to wait till May before deciding what to do on rates, but to continue to sound hawkish in the interim."

However, Oliver noted that the RBA appeared very concerned about the inflation boost from the war's impact on oil prices, making it even harder to bring inflation back down.

"This has been reinforced by hawkish comments since the war started by both the Governor and Deputy Governor suggesting that they are inclined to act quickly to be more confident of getting inflation back down," he said.

"As such, and while it’s a close call, we are now expecting another 0.25 per cent hike in the cash rate to 4.1 per cent on Tuesday."

Betashares chief economist David Bassanese similarly expected the RBA to hike rates today, with the upside energy price risks arising from the war in Iran adding to their existing angst over the inflation outlook against the backdrop of a still firm economy.

"Although energy price shocks have mixed effects on the economy, with the labour market already tight and inflation high, the RBA appears to be focusing on added upside inflation risks rather than the downside growth risks," said Bassanese.

"Indeed, to the extent higher energy prices hurt economic growth, the RBA would likely judge that a good thing in current circumstances."

Bassanese said that, given that the next meeting was not until May, the RBA was unlikely to be willing to wait to see how the Iran war plays out.

He is also expecting a follow-up hike in May to "truly squeeze down on the economy" and have inflation ease later in the year.

"It's not out of the question that the RBA could hike twice more this year and be cutting rates again by November or December."