Financial markets are pricing a 90 per cent probability that the Reserve Bank will raise the cash rate by 25 basis points to 4.6 per cent when its Monetary Policy Board concludes its meeting on Tuesday afternoon. The increase would take rates to their highest level since November 2011.
The bank's nine board members, led by Governor Michele Bullock, began receiving staff briefings this afternoon before reconvening on Tuesday morning to discuss and vote. The decision will be released at 2:30pm AEST, followed by a press conference at 3:30pm where Bullock is expected to explain the reasoning and signal future moves.
Economists had previously expected the bank might wait until November, when its next full set of economic forecasts is due in the Statement on Monetary Policy, but mounting inflation pressure has brought the decision forward. The bank will not receive updated quarterly forecasts at this meeting.
According to economist Alan Kohler, the RBA is likely to deliver a "hawkish hike" — meaning language that signals further increases may follow. However, he notes that three new forces outside the bank's control are now pulling in different directions on inflation.
On one hand, a new front in the Middle Eastern conflict has opened between Iran-backed Houthi forces and Saudi Arabia. The Houthis have launched drone and ballistic missile attacks on Saudi oil terminals and pipelines, captured the port of Mokha, and now control the entrance to the Red Sea at the Bab el-Mandeb Strait. They have also damaged the east-west pipeline that allowed Saudi Arabia to bypass the Strait of Hormuz. The only remaining alternative route is a limited pipeline through the UAE to the Port of Fujairah. Kohler warns that if a full-scale war erupts, oil prices could head towards $US150 a barrel, pushing inflation higher.
Compounding that risk, US President Donald Trump addressed the United Nations General Assembly last week, asking rhetorically whether he should "annihilate the Islamic Republic" and warning of driving Iran "into hell with no chance of survival." While the remarks were met with scepticism, Kohler argues they reflect a genuine crisis: the US must find a way to end the conflict quickly to prevent an "economic and political disaster."
On the other hand, two longer-term factors could reduce inflation by dampening economic growth. The government has signalled cuts to migration, which reduces demand for housing and services. Separately, the trajectory of AI autonomy and productivity gains may now be curtailed, which could limit the inflationary impact of technology-driven growth.
Despite these cross-currents, the immediate consensus among economists and markets is that the RBA will raise rates this week. The ASX is expected to open flat on Monday, with futures indicating a cautious start ahead of the decision.