RBA to hike rates by 25 bps in March, follow-up in May

Westpac now expects two 25bp RBA rate hikes—one in March and another in May—pushing the peak cash rate to about 4.35%. A recent spike in oil prices could temporarily lift headline inflation and prompt the RBA to act to prevent rising inflation expectations; however, Westpac notes the RBA could delay until May if market instability worsens or oil falls sharply.

Analysis

The RBA leaning toward front-loaded moves to offset transient oil-driven CPI lifts creates a small-but-meaningful regime shift: policymakers now appear to react to headline noise to defend inflation expectations. That increases the probability of a near-term rise in short-term yields and a temporary tightening of AUD funding conditions, which will disproportionately benefit institutions with large deposit franchises and interest-rate sensitive NIMs while penalising highly levered mortgage borrowers and duration-heavy assets.

Second-order winners are domestic commodity exporters that enjoy both firmer local rates (reducing currency hedging drag) and higher commodity prices; losers include domestically focused REITs, mortgage originators with mark-to-market funding lines, and mid-cap industrials facing higher energy input costs. There's also a cross-asset plumbing effect: higher short yields in Australia will re-price carry trades, likely drawing JPY/CHF funded USD/AUD positions, increasing FX volatility and episodic liquidity squeezes in EM local rates via correlation channels.

Key catalysts and time horizons: the market will re-test this narrative around two windows — the RBA meeting in March and the follow-up in May — with oil price direction and market-instability metrics (AUD FX vols, ASX 200 puts, 2y swap spreads) acting as immediate triggers. Tail risks: an oil reversal or a systemic risk event could flip the trade quickly, producing a squeeze into rate bets and a fast rally in Australian duration that would punish long-bank, short-rate positions.

Key Decisions for Investors

• Long CBA.AX vs short SGP.AX (pair): Buy CBA.AX 3-month exposure and short SGP.AX equal notional to express bank margin widening vs REIT compression. Timeframe 1-3 months; target +15% relative return, stop if CBA underperforms SGP by -8%; expected risk/reward ~2:1.
• Buy Woodside exposure (WDS.AX) via 1-3 month call spreads to harvest oil-driven upside while capping premium decay: buy WDS.AX 3M ATM calls and sell 10-15% OTM calls. Target 30-60% upside on option premium if oil holds; max loss = net premium (~100% of downside), expected R/R ~3:1 if oil remains elevated.
• Express AUD rate differential via long AUD/JPY spot or 3M forward: size as 1-2% of book, target AUD appreciation of 3-5% into/after RBA hikes; hard stop if AUD falls 2% intraday or implied AUD vols spike >50% from current levels. Rationale: front-end yield repricing + carry into AUD should tighten JPY-funded positions.
• Macro protection: buy Australian 2-year government bond futures or long 2y Australia swaps as a hedge against a policy pause/market stress that forces a rapid dovish repricing. Size to offset ~50% of duration exposure in the Australian equity long-book; payoff is asymmetric in a fast rally in front-end rates (tail hedge).