Why the RBA could lift interest rates again this month

The Reserve Bank of Australia (RBA) could be preparing to raise interest rates again as inflation pressures remain stubbornly high.

Several economists and market indicators now suggest a rate hike is becoming increasingly likely. The central bank’s next policy meeting will take place on 16th to 17th March.

If the RBA does move, it would lift the official cash rate from its current level of 3.85%. This would mark another step in the central bank’s effort to bring inflation back within its target range.

Here’s what investors need to know.

Markets are increasingly pricing in a rate hike

Financial markets have rapidly shifted their expectations in recent days.

According to ABC News, the probability of a rate hike at the next RBA meeting has climbed to around 67.5%. That figure has surged following recent comments from RBA deputy governor Andrew Hauser.

Hauser said the Australian economy currently has “limited spare capacity”, suggesting demand in the economy remains strong.

He also noted that inflation pressures could end up higher than the RBA previously expected.

Those comments have prompted investors to rethink the likelihood of near-term monetary tightening.

Some major banks and economic research groups have also changed their forecasts.

Economists at Capital Economics now expect the RBA to deliver a 25-basis point increase in March. Another potential rise in May could push the cash rate towards 4.35%.

UBS has also flagged the possibility of a rate hike arriving sooner than previously expected.

Inflation risks remain a key concern

One of the biggest reasons behind the renewed rate hike expectations is inflation.

Australia’s headline inflation rate recently sat around 3.8%, which remains above the RBA’s target band of 2% to 3%.

At the same time, the labour market remains tight. The unemployment rate is currently around 4.1%, indicating strong employment conditions across the economy.

Strong economic growth is also adding to inflation concerns. Recent figures showed the Australian economy expanded 2.6% over the past year, the fastest pace in roughly 3 years.

Some economists believe that overseas developments may also put further pressure on inflation.

The recent surge in oil prices linked to tensions in the Middle East has raised concerns that energy costs could push inflation higher in the months ahead.

If that happens, the RBA may feel the need to keep monetary policy tighter for longer.

What this could mean for investors

Higher interest rates can have mixed impacts on the share market, including the S&P/ASX 200 Index (ASX: XJO).

Banks and financial companies sometimes benefit from higher rates because they can earn more income on lending.

However, rate hikes can weigh on sectors that rely heavily on borrowing, including property companies and highly valued growth stocks.

For now, all eyes will be on the RBA’s upcoming policy meeting.

The post Why the RBA could lift interest rates again this month appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.