TD Securities’ Prashant Newnaha expects the Reserve Bank of Australia to raise rates by 25 bps in March and again in May, fully reversing last year’s cuts and taking the cash rate back to 4.35%. The call is underpinned by above-potential GDP growth, a tight labour market and rising inflation risks, with policy now focused more on inflation expectations than unemployment.

RBA seen hiking twice by May

"TD expects the RBA to deliver a 25bps hike at next week's meeting with a follow-up 25bps hike in May. As a minimum, the cuts the RBA delivered last year should be reversed. This implies the RBA returns the cash rate to 4.35% by its May meeting."

"Looking ahead the growth outlook appears upbeat. S&P Global's Composite New Orders series shows New Orders are not only expanding in Australia (>50), but they are the highest amongst its DM peers. Also NAB's Business Survey for February showed Forward Orders hitting the highest levels since late 2022."

"With growth running above the economy's speed limit, the implication is there is limited spare capacity. Estimates of NAIRU vary widely. For example Treasury has NAIRU around 4.25% while RBA Testimony to the Economics Legislation Committee revealed NAIRU to be at 4.6%."

"Trying to reduce inflation when growth is strong and unemployment is low is preferable to the scenario when growth is weak and unemployment is high. The RBA is in the right spot to hike and enforce its credibility as the real inflation anchor."

"So the question is how the data since then, both in the domestic economy and on Iran, change that picture. There’s clearly information on the upside for inflation over that period. 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."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)