Money markets and the majority of economists expect the central bank to raise the cash rate to 3.85 per cent on Tuesday amid concerns inflation could get as high as five per cent following a spike in oil prices caused by war in the Middle East.
The turning point in commentary came courtesy of a hawkish podcast appearance by RBA deputy governor Andrew Hauser, which caused traders to reprice the chance of a March hike from about one third to more than two thirds.
But JP Morgan economists Ben Jarman, Tom Kennedy and Tom Ryan thought his remarks were more balanced than the market appeared to interpret, highlighting "arguments on both sides".
The trouble for the RBA is the conflict will cause prices to rise at the same time as it will push down economic growth - a stagflationary event.
This is different to the post-COVID inflation spike, in which the energy supply shock from Russia's invasion of Ukraine interacted with high global growth, meaning there was less of a risk to employment, which the RBA has to manage as part of its dual mandate.
By assuming the RBA would take a more hawkish approach this time around, markets were ignoring the inherent differences between the two cycles, the JP Morgan trio said in a research note.
"There is ... a sense that markets assume central banks will attempt to fight the last inflation war, keen to demonstrate vigilance after 2022's experience," the three JP Morgan economists said.
"That episode was somewhat different, however, in that it was not a pure supply shock, with global growth running at five per cent.Â
"The implications for growth seem straightforwardly negative if a firmer than usual stance is taken to what is a more conventional supply shock this time."
While the labour market was still running strong, other indicators such as consumption and capacity utilisation were showing early signs of easing, they said.
Official data is yet to show the impact of the RBA's first interest rate rise in February.
AMP chief economist Shane Oliver agrees it would be a bad idea to hike rates, given all the uncertainty around the Middle East war.
"We think it makes more sense to wait till May before deciding what to do on rates, but to continue to sound hawkish in the interim," he said.
But he still thinks the RBA will lift rates on Tuesday.
As do economists at all the big four banks.
"The effect of higher oil prices on headline inflation is large but temporary," Westpac chief economist Luci Ellis said.
"The RBA Monetary Policy Board will nevertheless feel compelled to react, especially given the hit to confidence and financial markets from the Middle East conflict has so far not been severe."
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