Westpac warns RBA could raise rates again as inflation risks linger

Westpac’s analysis has pushed the possibility of another Reserve Bank of Australia move back into market focus, arguing that recent economic signals could justify higher policy rates at the start of the next quarter. The bank emphasises that underlying inflation, wage growth and labour market strength remain the central determinants of any additional tightening rather than calendar timing alone. Financial markets have begun to reprice both short‑dated policy expectations and longer‑dated yields, with the 10‑year government bond moving toward the 5 percent area and steepening the swap curve. That rise in long‑term yields amplifies the transmission of tighter financial conditions: it raises funding costs for households and businesses that rely on longer‑term borrowing and forces institutional investors to reassess duration exposures. For banks, a higher cash rate could lift net interest margins but rising long yields and tighter credit conditions also increase mark‑to‑market losses on fixed‑income holdings and raise credit risk over time. Households with variable mortgages face higher servicing burdens; those with longer fixed debt will feel the effects through refinancing costs when rolls occur. Corporates and treasurers confront higher hedging costs and a repricing of credit spreads that could squeeze investment plans. The exchange rate and international capital flows are sensitive to relative yield moves, so a sustained lift in Australian yields could attract inflows while pushing up import prices and hedging bills. For policymakers the dynamic narrows the margin for error: higher long yields can slow activity even if the cash rate is unchanged, complicating decisions over the pace and extent of further tightening. Westpac’s warning therefore tightens the interaction between incoming data, market pricing and RBA communication heading into March. Markets will scrutinise wage prints, services inflation and labour market indicators for signs of persistence, while watching how quickly the RBA shifts its tone on conditional guidance. The net macro outcome depends on whether additional tightening or higher long yields bring inflation back toward target without triggering a sharper downturn in activity; the balance of risks remains uncertain.