- Westpac is expecting three cash rate hikes in May, June, and August
- It's the first of the big banks to change its interest rates forecast
- Westpac says its revised outlook is linked to the extended conflict in the Middle East and its flow-on to fuel prices
Westpac is forecasting Reserve Bank cash rate increases in May, June, and August, adding two additional hikes to a peak rate of 4.85%.
Westpac is the first of the big four to revise its interest rate outlook with all previously agreeing there would be a cash rate hike in May.
Chief economist Luci Ellis said the shift reflects the longer disruption and slower recovery in fuel supply, with the Strait of Hormuz essentially closed for eight weeks and traffic recovering only slowly after that.
She said it also reflects the surprisingly rapid pass-through of higher fuel and oil-derived product prices into prices of other goods and services.
"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," Dr Ellis said.
Economy will pay price of halving of fuel excise
On Monday, national cabinet announced it was halving fuel excise in a bid to reduce near-term inflationary pressures.
This means a 26.3 cents a litre cut in excise tax for at least the next three months, saving drivers around $19 to fill up a 65-litre tank.
But Dr Ellis said despite the tax cut, a CPI annualised peak of 5.4% in the June quarter remains likely.
She pointed out Monday's cabinet announcement also doesn't affect prices of other oil-related products, including aviation fuel and various plastics or any price increases from damage to other production facilities in the Gulf states.
Dr Ellis said much of the second-round pass-through of prices is likely to remain in place with an expected trimmed mean inflation peak of around 4% later this year.
This is well above the Reserve Bank's inflation target of between 2-3%.
Weight on economic outlook
Westpac forecasts higher interest rates are expected to slow Australia's economic growth, especially consumption, with unemployment tipped to rise to around 5%.
Dr Ellis doesn't expect headline inflation to dip below the RBA's midline target of 2.5% until mid-2027, remaining in the lower half of the 2-3% target range until 2028.
Trimmed mean inflation, the RBA's preferred measure, will take longer to decline but will be back in the target range in 2028, Dr Ellis said.
But this is just one scenario.
Westpac has other forecasts should the Strait of Hormuz be closed for longer.
At this stage, Westpac doesn't see interest rates falling until 2028 with the RBA "slow" to reverse policy tightening.
RBA 'spooked'
Dr Ellis said the Reserve Bank monetary policy board will have already been spooked by the way inflation ticked up in late 2025.
So far in 2026, it has taken back two of last year's three cuts to the cash rate.
"We therefore suspect that the unwind of the current policy tightening will involve something of a 'once bitten, twice shy' mentality," Dr Ellis said.
"Second-round pass-through to other prices and costs will only increase the RBA's reluctance to unwind the current policy tightening."
The Reserve Bank's next monetary policy board meeting is set to take place on 4-5 May.
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