Second rate hike from RBA, here’s our view

Global Fixed Income
Global Fixed Income19 Mar 2026 429 Views
Second rate hike from RBA, here’s our view

- RBA has decided to increase cash rate to 4.10%

- The decision was a split decision (5-4), but the difference was in timing, not direction.

- The Board views the Middle East conflict as a potential dual-edged risk: sustained fuel spikes will drive inflation higher, while the resulting uncertainty may threaten to suppress domestic and global economic growth.

- This put RBA in a precarious position, as they would have to deal with higher than expected inflation, while weighing downside risk to growth and employment.

- Given this macroeconomic setup, there is a case to implement a Barbell strategy, weighting both the ultra-short (<1 year) and long ends (7 to 10 years) of the yield curve.


At its meeting on Tuesday, RBA has decided to increase the cash rate target by 25 basis points to 4.10 per cent, effectively erases two out of the 3 rate cuts happened in 2025.

The decision today is a majority decision, where five members voted to increase the cash rate target by 25 basis points to 4.10% while four members voted to leave the cash rate target unchanged at 3.85%.

Per RBA governor Michele Bullock, all the board members agreed that inflation is too high, and there are still inflationary pressures from excess demand in the economy. She said that the members that voted to hold were doing so in a "hawkish sense", what the difference was in the timing.

Table 1: Comparing February 2026 & March 2026 RBA statements

Feature

3 February 2026 statement

17 March 2026 statement

Board Consensus

Unanimous

Majority (5 members voted hike, 4 members voted hold)

Inflation Outlook

Inflation "likely to remain above target for some time."

"Material risk" that inflation stays high for longer; inflation expectations are now rising.

Primary Risk Factors

Domestic demand and tight labor markets.

Middle East conflict and its impact on fuel prices/energy supply.

Demand Drivers

Driven by both household spending and investment.

Business investment is higher than expected; household consumption is actually lower than expected.

Labour Market

Growth in unit labour costs "remains high."

Growth in unit labour costs declined, but unemployment remains lower than expected.

Global Context

Major trading partners showing upside growth; global uncertainty seen as "significant" but manageable.

Global risks are "substantial in both directions"; major concern that high energy prices will hurt trading partners.

Takeaway: The RBA is still in the fight to contain inflation, but the situation is now complicated by high fuel prices. The likelihood of more rate hike remains high.

Source: Reserve Bank of Australia, iFAST compilations, iFAST estimates. Data as of 17 March 2026.

 

On the Middle East conflict front, the board acknowledges that the conflict in the Middle East is likely to result in sharply higher fuel prices, which, if sustained, will add to inflation. On the other hand, the board opines that there is the possibility where higher fuel prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia.

This implies that the potential implications of the conflict on the growth in the world economy and growth in Australia remains uncertain, even to the RBA board. Hence, the board is expected to adopt a data driven, meeting by meeting approach to guide its decision. Importantly, RBA will have the March Q1 CPI data on their hands before its next meeting on May 4–5, to guide its cash rate decision.

Looking at the sovereign yield curve, the short end has shifted higher while the long end has softened. This is likely due to market interpreting that RBA is being less hawkish as expected.

Chart 1: Movement in Australia sovereign curve 


Prior to the spike in oil prices that is expected to kick in in the next CPI data, Australia CPI data is already at 3.8% yoy, driven by housing (+6.8%), food (+3.1%), and recreation (+3.7%). Trimmed mean CPI, which is RBA’s preferred inflation indicator, is at 3.4%, higher than RBA 2%-3% trimmed mean inflation target. While we previously believed that some of the CPI elements are seasonal factors, the closure of Strait of Hormuz has further complicates the situation.

Market is adjusting to the possibility of 2 more rate hikes

Looking at OIS (Overnight Index Swaps), they are being priced where they expect cash rates to hit approx. 4.60% by end-2026 (about 2 more rate hikes from today’s level). However, the Australia sovereign yield curve actually moved in the opposite direction after the RBA decision.

Instead of yields rising on the back of a hike, the 3-year yield actually fell by about 4 basis points to 4.54%. We opine it as a combination of few factors, which are the perception of 1) RBA is hiking into a weak consumer base (RBA statement: household consumption is lower than expected), predicting that RBA has limited capacity to hike in a fragile Australia consumer base and 2) the 5-4 split decision is interpreted as a hesitancy for RBA to hike too much from the current cash rate base, unless the data is bleak to dictate so.

Strait of Hormuz complicating RBA’s fight with inflation

As for the Strait of Hormuz event pushing up crude oil prices, a rule of thumb being used by analysts is that every 10% increase in the barrel price of Brent crude oil adds about 0.4% to Australia CPI. If somehow oil price sustained at USD100, that could add approximately 1.6% to headline CPI over the course of a year.

This would put RBA in a precarious position, as they would have to deal with higher than expected inflation, while weighing downside risk to growth and employment.

Should RBA opts to have more rate hikes to rein in inflation caused by the potential spike in oil prices, this may push short-term rates higher.

Our view

Given this macroeconomic setup, there is a case to implement a Barbell strategy, weighting both the ultra-short (<1 year) and long ends (7 to 10 years) of the yield curve.

As short-term yields may reprice higher to contain inflation, positioning at the ultra-short end allows investors to generate carry while waiting out the central bank's inflation fight.

On the other hand, we also hold a preference for long ends (7 to 10 years) as we also believe that the RBA is not in the best of intention to sustain an aggressive hiking path given weak household consumption, which may act as a structural cap on long yields. While RBA is worried about inflation, they are also worried about growth and employment level.

For investors looking for AUD bond exposure, you can consider the issues in the table below. 


Bond Recommendations

Issue

Issuer

Ask Price

Yield to Worst (%)

Years to Maturity / Next call

Bond Credit Rating (S&P / Fitch)

BPCEGP 6.5618% 12Jun2040 Corp (AUD)

BPCE SA

100.00

6.56%

14.24/9.24

-/BBB

ANZ 6.124% 25Jul2039 Corp (AUD)

Australia and New Zealand Banking Group Limited

99.15

6.21%

13.36/8.35

-/A-

WOWAU 5.910% 29Nov2034 Corp (AUD)

Woolworths Group Limited

99.78

5.94%

8.70/8.45

-/-

AUSGF 5.946% 10Dec2035 Corp (AUD)

Ausgrid Finance Pty Ltd

99.02

6.08%

9.73/9.49

-/-





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