Westpac has altered its cash rate forecast for the rest of the year, anticipating a new high of 4.85%.
With conflict in the Middle East continuing to place significant pressure on inflation, the bank says it now expects the Reserve Bank to increase the cash rate when it meets in May, in June and in August.
In difficult news for mortgage holders, three 0.25 percentage point increases would bring interest rates to levels not seen in almost two decades.
A cash rate of 4.85% or higher has not been seen in Australia since the end of 2008 during the Global Financial Crisis, and far outstrips the 4.35% cash rate highpoint reached in late 2023.
Westpac chief economist Luci Ellis said the fuel supply recovery expectations for Australia from the almost closure of the Strait of Hormuz have sparked the grim forecast.
The narrow waterway, which is located between the Persian Gulf and the Gulf of Oman, is the world’s most important oil transit area.
The regular movement of oil tankers around the Middle East has been seriously impacted by the war. Picture: Getty
According to the University of Technology Sydney, around 30% of Australia’s refined fuel supply effectively passes through the Strait of Hormuz, meaning prolonged delays or a closure of the area could wreak extreme havoc on already pressured petrol supplies.
“We believe the RBA will respond to this pricing behaviour by tightening monetary policy by more than would have been needed absent that pass-through,” Ms Ellis said.
It comes after the government announced on Monday that it had halved the fuel excise, which will reduce the cost of both diesel and petrol by 26.3 cents a litre in easing to last three months.
The government has halved the fuel excise. Picture: Getty
While this is likely to help keep a lid on headline inflation, Ms Ellis said a peak of 5.4% in the June quarter “remains likely” because of the oil supply shock's pass-through to other sectors.
“The announcement also does not affect prices of other oil-related products, including aviation fuel and various plastics, or any price increases from damage to gas and other production facilities in non-combatant Gulf states,” she warned.
“Much of the second-round pass-through of prices is therefore likely to remain in place, and we continue to expect trimmed mean inflation to peak around 4% later this year.”
The trimmed mean, used to help decide the cash rate, is currently sitting at 3.4%.
Westpac chief economist Luci Ellis. Picture: Martin Ollman
Australia's 4.1% cash rate is already an eight-month high, with Reserve Bank governor Michele Bullock acknowledging the bank’s hike earlier this month is “tough news for people with mortgages”.
“People hadn’t seen high inflation until 2022 and that gave people a taste of what happens when inflation gets a roll on,” she said after the decision.
Inflation has been well above the RBA’s 2-3% target band for more than six months, with domestic pressures having pushed inflation upwards prior to the outbreak of the Iran War at the start of March.
Homeowners with a mortgage can expected minimum repayments to rise by hundreds each month if three rate hikes do eventuate, with one hike alone adding around $80 a month on a home loan of $500,000.
Westpac's latest expectations for the cash rate come after the RBA revealed its pre-war economic forecasts in February were already based on a technical assumption that the cash rate could rise by around 60 basis points to hit 4.45% by mid-2028.
This technical assumption is a “what-if” number the RBA uses in its forecasts. While not a prediction, it is a starting point based on market expectations to see how inflation and growth might respond under a given scenario.
Westpac is joined by all other major home loan lenders in anticipating a rate hike at the RBA’s next meeting, which will fall on 4 May, one week before the 2026 Federal Budget.
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