UBS Forecasts Two More RBA Rate Hikes to 4.85%
UBS raises its forecast for Australian interest rates, predicting two additional hikes this year. The bank expects the cash rate to reach 4.85% by November.
UBS now expects the Reserve Bank of Australia to raise the cash rate two more times this year. The bank projects the rate will hit a peak of 4.85% by November. This represents a significant shift in recent market consensus. Many analysts previously expected only one final hike.
The bank cites three main drivers for this outlook. First, the global AI investment boom is adding to demand. Second, fuel prices are spiking, pushing inflation higher. Third, central banks worldwide are adopting a more hawkish stance. UBS sees a balanced risk of either one or three additional hikes.
Fuel Prices Drive Inflation Up
UBS estimates automotive fuel prices surged 16% month-on-month in August. This added approximately 53 basis points to headline CPI for that month. September fuel prices are tracking 7% higher again. This adds another 23 basis points to the inflation measure.
The bank forecasts headline CPI will return to 4.0% year-on-year in August. This sits above the RBA's 2-3% target band. UBS expects the RBA to hike rates in September to counter these pressures. A second hike is predicted for the November meeting.
Global Hawkish Shift Influences Policy
Major central banks are responding more aggressively to inflation. The US Federal Reserve raised rates by 25 basis points this week. UBS expects a further Fed hike in December. This global trend reinforces the case for tighter policy in Australia.
UBS notes that AI-related investment is boosting global demand. This effect is becoming more evident in the Australian economy. The bank believes these factors will force the RBA to revise its inflation forecasts upward. The peak rate of 4.85% is expected to hold for about 12 months.
House Prices Face Downward Pressure
UBS warns that higher borrowing costs will impact the housing market. The bank predicts house prices could fall by as much as 10%. Mortgage holders will face increased repayment obligations. The RBA has already raised rates three times this year to 4.35%.
Deputy Governor Andrew Hauser has questioned if current rates are sufficient. UBS agrees that more action is needed. The bank's latest note details these risks. Borrowers should prepare for sustained higher interest rates through next year.
