Westpac: A triple hike is expected to push the rate to the highest level seen since the GFC
Westpac has revised down its cash rate forecast for the year, expecting a new rise of 4.85%.
As unrest in the Middle East continues to put significant pressure on inflation, the bank says it now expects the Reserve Bank to raise interest rates when it meets in May, June and August.
In the difficult news for mortgage holders, a three-point increase of 0.25 percentage points would bring interest rates to levels not seen in nearly two decades.
A cash rate of 4.85% or higher has not been seen in Australia since late 2008 during the Global Financial Crisis, and is well ahead of the 4.35% cash rate reached by late 2023.
Westpac’s chief economist Luci Ellis said the expected oil recovery in Australia since the likely closure of the Strait of Hormuz had caused this negative forecast.
The narrow waterway, between the Persian Gulf and the Gulf of Oman, is the world’s most important oil transportation hub.
The constant movement of oil tankers around the Middle East has been adversely affected by the war. Photo: Getty
According to the University of Technology Sydney, about 30% of Australia’s refined oil successfully passes through the Strait of Hormuz, meaning a long delay or closure could cause significant damage to already stressed oil facilities.
“We believe the RBA will respond to this rate behavior by tightening monetary policy more than would have been necessary in the absence of that pass,” Ms Ellis said.
This comes after the government announced on Monday that it has halved the price of petrol, which will reduce the cost of diesel and petrol by 26.3 cents per liter for three months.
The government has halved the price of petrol. Photo: Getty
While this may help contain inflation, Ms Ellis said the 5.4% peak in the June quarter “could be there” due to shifts in oil supply.
“This announcement also does not affect the prices of other oil-related products, including jet fuel and various plastics, or any price increase from the destruction of gas and other production facilities in the non-combatant states of the Gulf,” he warned.
“So most of the pass rates in the second round are likely to remain in place, and we continue to expect capped inflation to rise to around 4% later this year.”
The cut rate, which is used to help determine interest rates, currently sits at 3.4%.
Westpac economist Luci Ellis. Photo: Martin Ollman
Australia’s cash rate of 4.1% is already at an eight-month high, with Reserve Bank governor Michele Bullock admitting the bank’s hike earlier this month was “difficult news for people with mortgages”.
“People haven’t seen inflation until 2022 and that gives people a taste of what happens when inflation starts,” he said after the decision.
Inflation has been above the RBA’s 2-3% target band for more than six months, with domestic pressures pushing inflation higher than before the outbreak of the Iran War in early March.
Homeowners with mortgages can expect the minimum payment to increase by hundreds each month in the event of three rate hikes, where one trip will add about $80 per month to a $500,000 loan.
Westpac’s latest rate expectations come after the RBA revealed that its pre-war economic forecasts in February were already based on the technical assumption that the rate could rise by 60 basis points to 4.45% by mid-2028.
This technical assumption is a “what-if” number that the RBA uses in its forecasts. Although not a forecast, 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 mortgage lenders in expecting a rate hike at the next RBA meeting, which will be held on May 4, one week before the 2026 Federal Budget.
