RBA set to hike to 4.35% today. NAB sees cash rate peaking near 4.6%.

National Australia Bank expects the RBA to hike 25bp to 4.35% on Tuesday, with updated forecasts likely to show a terminal rate of around 4.6% as energy-driven inflation and above-potential growth limit the bank's options.

Earlier:

• CBA tips RBA rate hike tomorrow but warns Iran war makes it a close call. Split RBA board
• May meeting, RBA set for third straight hike as Hormuz closure drives inflation surge
• Newsquawk Week Ahead: US NFP, ISM Services PMI, RBA, Canadian jobs and OPEC+

Decision is due at 2.30pm Sydney time (0430 GMT/ 0030 US Eastern time)

Summary:

• National Australia Bank expects the Reserve Bank of Australia to raise its cash rate by 25 basis points to 4.35% at its Tuesday meeting, returning the rate to its level before the cuts delivered through 2025, per the NAB note
• NAB cited above-potential domestic growth, a labour market operating near capacity and re-emerging inflation pressures as conditions that already justified tightening before the Middle East conflict escalated, according to the note
• First-quarter trimmed-mean inflation came in at 3.5% year on year, leaving the RBA with limited room to treat the energy price shock as temporary and look through its inflationary impact
• The RBA's updated Statement on Monetary Policy is expected to show downward revisions to near-term growth and upward revisions to inflation, with unemployment forecasts little changed in the near term but revised higher further out, according to NAB
• The cash rate assumption underlying the new SOMP forecasts is likely to peak at around 4.6%, up from the 4.3% peak embedded in the February SOMP

The Reserve Bank of Australia is widely expected to raise its cash rate by 25 basis points to 4.35% at its Tuesday meeting, according to National Australia Bank, with updated forecasts set to accompany the decision that point to a higher terminal rate than previously projected as energy-driven inflation narrows the central bank's room to manoeuvre.

The move, if delivered as NAB anticipates, would return the cash rate to the level that prevailed before the RBA began cutting through 2025, effectively unwinding that easing cycle in its entirety. NAB argues that the domestic case for tightening was already established before the Middle East conflict intensified. Growth was running above potential, the labour market was operating near capacity and inflation pressures had begun to re-emerge. The energy price shock has since added a further inflationary layer, lifting both actual inflation and near-term expectations in a way the RBA cannot easily dismiss.

The Q1 trimmed-mean inflation print of 3.5% year on year is central to that assessment. Trimmed-mean is the RBA's preferred measure of underlying inflation, and a reading at that level sits materially above the bank's 2% to 3% target band. With core inflation already elevated before the full impact of higher energy costs has passed through the economy, NAB argues the RBA has limited scope to treat the current shock as transitory and hold rates steady.

Alongside the rate decision, the RBA will release its quarterly Statement on Monetary Policy containing an updated set of economic forecasts, and NAB expects those projections to reflect the changed environment explicitly. Near-term growth forecasts are likely to be revised down, acknowledging the drag from higher energy costs and tighter financial conditions, while inflation forecasts are expected to move higher. Unemployment projections are seen as broadly unchanged in the near term but nudged upward further out in the horizon, consistent with a growth slowdown that eventually feeds into the labour market.

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A return to 4.35% would take the cash rate back to its pre-easing levels, effectively unwinding the rate relief Australian borrowers received through 2025 and signalling that the RBA regards the inflation resurgence as too broad to accommodate.

The implied peak of around 4.6% in the updated SOMP forecasts, up from 4.3% in February, is the more consequential number for markets, representing a meaningful upward shift in the terminal rate assumption that will reprice mortgage rates, business lending costs and Australian dollar positioning. With growth forecasts likely being revised down simultaneously, the RBA is walking into stagflationary territory where neither easing nor aggressive tightening offers a clean exit. Australian rate-sensitive equities and the property market face renewed pressure if the SOMP confirms a higher-for-longer trajectory extending well into the forecast horizon.