Westpac and NAB have revised their interest rate forecasts for a 25 basis point increase when the central bank board meets on Tuesday.
In its revised forecast, both banks expect a hike in March and May, which would take the cash rate from 3.85 per cent to 4.35 per cent.
The change came following hawkish commentary from the central bank's second-in-command.
RBA deputy governor Andrew Hauser struck a pessimistic tone about the impact of the war in Iran on inflation in a podcast interview with The Conversation's Michelle Grattan.
That prompted a sharp re-pricing in money markets for the RBA's next board meeting on Tuesday.
Ahead of the podcast, market pricing implied the chance of the central bank lifting the cash rate to 4.1 per cent was less than one-third.
Afterwards, it surged to almost two-thirds.
Speaking just before RBA board members enter their pre-meeting media blackout period, Mr Hauser's comments were viewed by some economists as laying the groundwork for a hike.
Economists at Bank of America, UBS and Capital Economics brought forward their rate rise forecast to March, while TD Securities views an increase then as an even bet.
"There is a credible case to hike next week," TD senior rates strategist Prashant Newnaha said.
Compared to remarks by governor Michele Bullock the week before, Mr Hauser painted a more dire picture of how conflict in the Middle East could cause oil prices to surge and entrench inflation.
The cost of oil whipsawed on the back of contradictory commentary by US President Donald Trump, from a high of $US118 a barrel to around $US90, in one of the most chaotic 24 hours commodities traders have witnessed.
"If we fail to act decisively enough to prevent inflation staying high or even rising  ... it will be bad for everyone and it's worth us continuously reminding ourselves just how toxic inflation is," Mr Hauser said.
IFM Investors chief economist Alex Joiner noted a change in tone that suggested the board would be more comfortable with hiking rates, even if it caused unemployment to rise.
"(Mr Hauser) interestingly omitted any mention of the board's strategy of 'preserving gains' in the labour market, only saying he'd be 'happy' if full employment was maintained", Mr Joiner wrote in a post on X.
The deputy governor noted risks to both sides, with the war in the Middle East likely to cause higher inflation and to put downward pressure on growth.
"I think there will be a very genuine debate," Mr Hauser said.
It poses a dilemma for the RBA, which will be mindful of being squeezed between its dual mandates of keeping inflation low and targeting full employment.
How the conflict played out was highly uncertain, which could be seen as emphasising the need to stay on hold, NAB economists said.
But Mr Hauser also concluded recent data confirmed even more decisively that the economy was constrained on the supply side.
"All up, we take Hauser's comments as putting the market on notice that it should not be surprised if the RBA decides to raise rates next week," NAB economists said in a research note.
27°C