• We still expect two more RBA rate hikes after the one this week. However, as we flagged as a consideration on Tuesday, we now think that the Monetary Policy Board (MPB) will want to pause in June. In the post-meeting media conference, Governor Bullock characterised the three rate hikes so far as dealing with the high inflation issue that already existed before the conflict in the Middle East started, and that this “gives space” for the MPB to see how the conflict plays out. Together with the dissenting vote, we read this as saying that another back-to-back hike in June is no longer a better-than-50% chance. It is not a zero chance, either, but it should not be the base case.
  
  
• We do not think the MPB will have much time to catch breath, though. Today we publish fresh forecasts in our May Market Outlook, based on a revised timeline for the reopening of the Strait of Hormuz. This includes a revised inflation forecast that, while only a little higher than our previous profile, involves noticeably higher trimmed mean inflation in the second half of 2026 than the RBA’s forecasts.
  
  
• The RBA acknowledges indications that “higher fuel prices are likely to have second-round effects on prices for goods and services more broadly”. Our assessment is that there will be more of this than the RBA forecasts imply, especially in areas such as home-building costs. It should also be noted that our inflation forecasts are based on our own forecasts for oil and fuel prices, which track somewhat higher than the futures curve that the RBA uses as a technical assumption in its forecasts.
  
  
• Our rates view is, as always, based on our assessment of what the RBA will do if things turn out as we expect, in line with our own forecasts. We therefore retain our view that two further hikes are more likely than one. It will take some time before the need for the additional hikes becomes apparent in the data and spurs a MPB decision, though. Key events between now and the June meeting, including the Federal budget and National Wage Case decision, are unlikely to turn the dial on the RBA forecasts. The RBA’s reaction to the second-round inflation will thus be a bit later than we previously assumed.
  
  
• We therefore push the timing of these two hikes out to August and September. We think the Q2 and Q3 inflation data will be something of a ‘wake-up call’ on the willingness of firms to pass on increases in non-labour costs into their own prices (though this is something we would be glad to be wrong about). Subsequent quarters may also show a lack of unwinding of recent downstream price increases as fuel costs ease. The Governor may come to regret stating that passing on costs arising from fuel price increases was “reasonable”, if this is interpreted to mean full pass-through with no reversal later.
  
  
• This change in our rates view is a tactical change reflecting our assessment of the RBA’s appetite to continue the current pace of tightening in the current uncertainty, coupled with its evidently less stark view about pass-through to other prices. It is not a fundamental shift in our view of the outlook. We will continue to monitor developments in the Middle East and domestic cost pass-through, and adjust our view as appropriate.

This article was first published on Westpac IQ.