Updates with analysts raising GDP forecasts in paragraphs 10-12

By Stella Qiu and Wayne Cole

SYDNEY, March 3 (Reuters) - Australia's top central banker on Tuesday said an increase in interest rates was possible this month if the policy-making board decided inflation expectations were at risk of becoming unanchored, and markets should be aware of that.

Speaking at a business conference in Sydney, Reserve Bank of Australia Governor Michele Bullock emphasised every policy meeting was live now given inflation stayed elevated at 3.8% and the unemployment rate remained low at 4.1%.

"I'm not making a prediction about March but it will be a live meeting," Bullock told the Australian Financial Review Business Summit. "The board will be actively looking whether or not it needs to move more quickly."

Markets have tended to assume the central bank would wait for the first-quarter consumer price report due on April 29 before deciding whether to lift rates again at its May 5 board meeting.

Bullock said she wanted to "dissuade" markets from thinking like that, adding that there is a risk that inflation expectations may start to move given the likely supply shock from the Middle East conflict and already elevated inflation.

After her remarks, three-year Australian government bond yields AU3YT=RR extended earlier rises to be up 13 basis points at 4.313%.

Markets moved to imply around a 30% chance of a quarter-point rise at the next meeting on March 17, while fully pricing a tightening for May. They also imply around a 75% chance of a further rise to 4.35% by year-end. 0#AUDIRPR

GDP COULD SURPRISE ON HIGH SIDE

All eyes are on the fourth-quarter gross domestic product report due on Wednesday.

Forecasts for a 0.6% quarterly expansion are old news now, after data on Tuesday showed net exports proved to be a smaller drag on GDP, subtracting 0.1 percentage points, while public spending added more than expected - 0.3 percentage points - to growth.

Analysts at Commonwealth Bank of Australia and National Australia Bank now see the economy growing at a rapid 1% in the quarter. Westpac tips an even higher rate of 1.1%.

"At this pace the Australian economy is running well above estimates of potential growth, helping to explain the inflation dynamics we have seen over late 2025 and in the early stages of 2026," said Ashwin Clarke, an economist at CBA.

"We favour May as the most likely outcome for the next rate hike, but recent data flow lifts the risk of March."

Asked about the implications of the conflict in the Middle East and the rise in oil prices, Bullock noted Australia was a net energy exporter which gave the economy a buffer.

However, she cautioned that if the rise in global energy prices was prolonged that could weigh on consumer demand and economic growth, while also putting upward pressure on inflation.

(Reporting by Wayne Cole and Stella Qiu; Editing by Chris Reese, Shri Navaratnam and Sonali Paul)

((Wayne.Cole@thomsonreuters.com; 612 9171 7144; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net/))