Westpac economists have revised their forecasts to include two additional rate rises - meaning three more hikes in total this year - and lifting the expected cash rate peak to 4.85 per cent, on a view the Reserve Bank will err on the side of caution as the impact of the Middle East conflict flows through fuel prices and into broader inflation.

 

“We now expect the RBA to hike in June and August as well as May,” said Luci Ellis, Westpac’s chief economist, citing, “the longer Middle East conflict and early signs of strong second‑round pass‑through from fuel to other prices”.

 

Under the revised view, Ellis now expects 25 basis point hikes at the May, June and August policy meetings.

 

The change reflects assumptions that fuel supply disruptions will last longer than previously thought, with the Strait of Hormuz effectively closed for around eight weeks and shipping traffic recovering gradually.

 

“It also reflects the surprisingly rapid pass‑through of higher fuel and other oil‑derived product prices into other prices in Australia,” Ellis said. “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.”

 

The federal government’s decision to halve fuel excise will ease near‑term headline inflation, but Ellis said it does little to change the broader inflation picture.

 

“A peak of 5.4 per cent year‑on‑year in the June quarter remains likely,” she said, noting the excise cut does not affect aviation fuel, plastics or other oil‑related inputs, or price pressures from damage to production facilities in the Gulf region.

 

As a result, Westpac continues to expect trimmed mean inflation to peak at around 4 per cent later this year.

 

Higher interest rates are expected to weigh on economic growth, particularly household spending. Ellis said the labour market is also likely to soften.

 

“We expect unemployment to peak around 5 per cent, somewhat higher than the 4.7 per cent peak we flagged last week.”

 

Looking further ahead, Ellis said headline inflation is expected to fall below the midpoint of the RBA’s target band by mid‑2027 and remain in the lower half of the 2 to 3 per cent range through to 2028. 

 

Trimmed mean inflation is expected to take longer to ease, returning to target in 2028.

 

Despite that outlook, Ellis said the RBA is likely to be cautious about cutting rates once inflation begins to fall.

 

“We think the RBA will be slow to reverse this policy tightening,” she said, adding that recent inflation surprises and concerns about second‑round price pressures, after last year’s rebound in inflation, would make policymakers reluctant to unwind rates too early.

 

Westpac now expects rate cuts to begin in 2028, with four reductions pencilled in across the year, though Ellis noted there was “low conviction about the exact timing”.

 

For the full report, visit Westpac IQ.