The Reserve Bank of Australia is widely expected to raise the cash rate by 25 bps, bringing it to 4.10%. These expectations were initially driven by stronger-than-expected economic data, but the US–Iran war has since added another layer of upside risk to inflation.

What really cemented expectations for a hike, however, were comments from RBA’s Hauser, who warned that keeping interest rates too low could trigger a damaging rise in inflation expectations. Referring to the oil price shock of 2022, he added that the RBA does not want to repeat that experience and that failing to raise rates to the level needed and allowing inflation to spiral out of control, would be a serious mistake.

Hauser also noted that “there will be two sides to the debate,” likely suggesting that beyond March the central bank’s decisions will depend heavily on how the US–Iran war evolves.

Markets are currently pricing in around 71 bps of additional tightening by year-end, implying roughly two more rate hikes after the one expected tomorrow. Given such strongly hawkish expectations, the Australian dollar might be at risk of a drop in case the RBA adopts a patient stance or directly signals a pause.

The longer the US–Iran war and the disruption in the Strait of Hormuz persist, the greater the drag on the global economy will be. For that reason, markets expect the RBA to bring its rate hike forward to tomorrow, reflecting pre-war economic conditions and new upside risk to inflation. Beyond that, policymakers are likely to adopt more of a “wait-and-see” stance rather than relying on forward guidance.