MNI INTERVIEW: March RBA Hike Possible As Jobs Market Tightens

The Reserve Bank of Australia Board could hike the cash rate again at its March 17 meeting if unemployment continues to decline toward 4%, otherwise it is likely to leave it at 3.85% until May, with another increase possible later in the year depending on inflation, a former bank official told MNI.

“Another hike is the central case for now. That makes sense, either one or two further moves later in the year,” said Justin Fabo, founder of Antipodean Macro and the RBA’s former head of international financial markets, noting a tighter labour market will give the Reserve cover to increase sooner. 

Markets assign a 10% probability to a March hike, with odds rising to 71% for May.

Fabo said the RBA’s hawkish shift last week, which he had anticipated in November, signaled its desire to contain inflation. (See MNI INTERVIEW: Spare Capacity Risks 2026 H2 RBA Hike - Fabo) While temporary factors may have amplified recent price readings, the board’s approach remains prudent, with little downside unless the economy weakens unexpectedly, he said.

“The updated forecasts reflect a big shift in the Bank’s thinking, but beyond six months, forecasts are inherently uncertain,” he added, noting the RBA’s focus is on the near-term outlook. (See MNI RBA WATCH: Bullock Says Policy Too Loose, Hikes 25BP)

The Bank’s forecasts showed more negative outcomes across most indicators despite the higher assumed cash rate. Headline inflation is now forecast to reach 4.2% by June, up from 3.7% in November and the 3.1% expected in August, before easing to 2.9% by June 2027, 20 basis points higher than previous projections. Unemployment is expected to rise to 4.5% by December 2027 and 4.6% in 2028. Labour productivity growth was lowered 30bp to 0.6% over the next 18 months, while GDP growth was cut 30bp to 1.6% by June 2027.

A risk to the RBA’s hawkish stance would arise if trimmed-mean inflation projections prove too high, but strong household consumption data supports the Bank’s view of resilient domestic demand, Fabo noted, citing the 1-point-increase to Q4 spending expectations within the bank's forecasts to 3.1%.

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Noting Governor Michele Bullock’s comments that the cash rate at 3.85% sits near the middle of the neutral rate range and that the labour market remains "a bit tight," Fabo said the RBA may be adjusting its key variables closer to its model outputs rather than leaning on its previous assumptions.

Pointing to other economists who see the neutral rate higher at 4.5%, Fabo said he agreed largely with the direction, but not the degree of change. 

"If they're right, then the economy is going to have a bit of a moment. It's going to look like New Zealand over the next few years," he argued. "And I'm also conscious that New Zealand, like everyone else, has struggled to get inflation below that target, not even to that target. That's the one common theme for central banks. No one has really achieved their inflation targets. Some have on a headline basis, but not on a kind of core basis, and the RBA makes that point in the statement again. It's potentially a worry 12 months down the track for everyone."