RBA's March Hike: A Flow-Driven Policy Pivot

The Reserve Bank's communication has shifted from passive to proactive. Governor Michele Bullock explicitly stated that every policy decision is "on the table", directly challenging the market's long-held assumption that the board would wait for fresh quarterly inflation data before acting again. This is a clear pivot, framing the upcoming March meeting as a live event where a back-to-back rate hike is now a serious consideration.

The primary catalyst for this shift is a spike in oil prices driven by Middle East tensions. The RBA sees this as a harder-to-look-through shock, given that inflation is already elevated. While Australia's status as a net energy exporter provides some buffer, Governor Bullock cautioned that a "prolonged" rise in global energy prices could weigh on consumer demand and economic growth while simultaneously putting upward pressure on inflation.

Market pricing has reacted swiftly to this new reality. The probability of a March hike has jumped from near zero to higher than 25%, a significant increase from prior expectations of a wait until May. This flow-driven repricing shows traders are now pricing in the risk of a live meeting, reflecting the central bank's new, more urgent stance.

The Inflationary Flow: Oil Shock Meets Sticky Core

Headline inflation remains elevated at 3.8%, but the real pressure point is the tick higher in underlying inflation to 3.4%. This shows core price pressures are not cooling, creating a persistent flow of upward momentum that the RBA must address. The central bank's key concern is that a temporary shock could become permanent if expectations shift. The oil price surge adds a large, temporary flow to headline inflation. Governor Bullock noted that while Australia is a net energy exporter, a "prolonged" rise in global energy prices could simultaneously push inflation higher and weigh on growth. This creates a difficult trade-off, testing the RBA's commitment to anchoring expectations.

The board's urgency stems from the fear that this shock could unanchor inflation expectations-a threshold that would compel a faster response. The RBA has signalled it is willing to react to the spike in headline inflation to head off a sustained rise in expectations, even if the underlying trend remains sticky.

The Market's New Reality: Pricing a 25bp Hike in March

The consensus has shifted decisively. A Reuters poll shows 23 of 30 economists expect the RBA to raise the cash rate to 4.10% in March, a clear break from February's expectation of a hold. This is a direct flow response to the central bank's new urgency, with the market now pricing a live meeting as the base case.

The revised forecast implies two hikes are now the expected path. The median projection now sees the cash rate reaching 4.35% by the end of 2026. This is a notable upward revision from the 3.85% median seen just a month ago, signaling that the tightening cycle is viewed as continuing beyond the March meeting.

This re-pricing is moving the market. The Australian dollar has reacted, with the AUD/USD pair up 0.12% on the day as the probability of a March hike increases. The flow of capital is adjusting to the new policy outlook, where higher rates are now the anticipated norm.