The Australian central bank decided to increase the cash rate again in March, marking the second RBA interest rate increase in the last two meetings. Aussies may be wondering if there's any more pain to come following the 25 basis point (0.25%) rise to 4.1%.
The pace of inflation was already looking a bit hot before the Iran war, and now the outlook seems even more difficult following the Middle East conflict.
After two rate increases this year already, borrowers may be wondering and worrying about what could happen over the rest of the year. Economists at UBS have shared their views on what the financial institution expects.
Image source: Getty Images
Elevated inflation
UBS noted that the RBA seems like a "hawkish outlier" compared to most global central banks, with the current cash rate now only 25 basis points (0.25%) below the prior cycle's peak of 4.35%.
The RBA vote was five votes for a hike and four for a hold, so UBS called it a 'dovish hike'. UBS thinks that the RBA governor and deputy governor voted to hike, along with three external members. The February 2026 vote was unanimous, 9 to 0.
The central bank noted in its statement that "inflation is likely to remain above target for some time" and "risks have tilted further to the upside, including to inflation expectations."
UBS explained:
Our interpretation of this comment remains on the hawkish side. We see this comment as a signal that as long as inflation remains too high, then each RBA meeting is 'live' to another potential rate hike.
How high could the RBA interest rate go?
At the subsequent press conference, the RBA governor didn't want to answer whether this week's rate rise was 'front-loading' or not.
UBS expects the RBA interest rate to increase by another 25 basis points (0.25%) in May 2026, bringing the rate to 4.35%. However, the board's split decision suggests it's possible the RBA's next meeting in May 2026 could be a pause.
The broker also suggested that the RBA's commentary was hawkish enough that the RBA staff's recommendation will be a hike at the next meeting in May 2026. It's possible the next meeting could also be a 5-to-4 rate-hike vote again. Additionally, there's a risk the RBA will have to hike to 3.60%, though that's not UBS's central case.
UBS said:
Further ahead, we see a prolonged period of a peak in interest rates at 4.35%; unless there is a material change in the negative direction of: 1) the debt and household wealth cycle, which is booming ~8% y/y to 10% y/y; 2) nominal Government spending, which is still booming ~8% y/y; and/or 3) the global outlook deteriorating amid higher energy prices.
More broadly, for the RBA to achieve its mandated inflation goal of 2½% y/y (after inflation has already been above the RBA's target for most of the last ~4 years), it seems increasingly likely that interest rates will need to remain 'higher-for-longer', in order to slow GDP growth for long enough, to get the unemployment rate significantly higher than now.
With higher rates, that's likely a tailwind for the net interest margin (NIM) of Commonwealth Bank of Australia (ASX: CBA), National Bank of Australia Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC), but a headwind for borrowers going into arrears.
