Citi’s updated projection stems from a sharply disparate economic landscape in Australia, where a sustained downturn in the housing market is being largely counterbalanced by a surge in artificial intelligence-related investment. This boom is heightening capacity constraints and inflationary pressures, effectively offsetting the disinflationary effects emanating from the residential sector.

In a research note released on Friday, a team of Citi economists, including Faraz Syed, pointed to persistently weak productivity, a tight labor market, and elevated oil prices as key factors likely to keep inflation stubbornly high. “We believe the RBA needs to implement further monetary tightening to proactively curb inflation, although the board’s dovish-leaning stance may cause delays in action,” the analysts wrote.

As a result, the firm has raised its terminal cash rate forecast to 4.85%, up from the previous projection of 4.60%. In line with this more hawkish view, Citi has established a new trading position, selling November overnight index swaps at 4.66% with a target of 4.85%. The strategy is based on the rationale that the market is underestimating the likelihood of consecutive rate increases, which Citi believes are necessary to bring price pressures under control. The revision marks a significant shift from Citi’s prior expectation, which had anticipated only a single rate hike.