Westpac now expects the RBA to hike rates in both March and May as policymakers respond to oil-driven inflation risks.
Summary:
Westpac now expects the RBA to raise the cash rate by 25bp in both March and May, revising its earlier forecast of a single hike.
The projected terminal rate is now 4.35% under the bank’s updated outlook.
The change reflects the inflationary impact of higher oil prices and signals from the RBA that it may act to prevent inflation expectations from rising.
Westpac says a single hike remains possible, particularly if volatility escalates or the oil shock proves temporary.
The bank still expects rate cuts to begin in late 2027 as inflation returns toward the target midpoint.
Westpac has revised its outlook for Reserve Bank of Australia policy, now expecting the central bank to deliver two rate hikes in the coming months as policymakers respond to rising inflation risks linked to higher oil prices.
In a research note, the bank said it now expects the RBA to raise the cash rate by 25 basis points in both March and May, a shift from its earlier forecast that anticipated a single increase in May with additional tightening only as a possibility.
Under the revised outlook, the RBA’s policy rate would reach a peak of 4.35%, reflecting a more proactive response to the latest inflation developments.
The change in forecast follows a reassessment of the likely impact of the recent surge in oil prices stemming from geopolitical tensions in the Middle East. While Westpac believes the effect on headline inflation will likely prove significant but temporary, it argues the central bank may still feel compelled to act in order to prevent inflation expectations from drifting higher.
According to the bank, recent communication from the RBA
- RBA policymaker Hauser says oil price and Middle East volatility is a "genuine challenge"
- ICYMI: RBA’s Hauser warns oil price risks could intensify rate rise debate (March 17 live)
has reinforced the view that policymakers remain cautious about the economy’s supply-side capacity. Even after the latest national accounts data, which included revisions, softer consumption indicators and more benign unit labour cost readings, the central bank has continued to emphasise concerns about limited spare capacity.
That stance suggests the RBA may be inclined to respond pre-emptively to an inflation shock, even if it is driven primarily by energy prices.
Westpac also noted that the RBA has signalled a willingness to react to headline inflation spikes to guard against the risk of inflation expectations becoming unanchored, despite the fact that expectations have remained relatively stable through previous shocks.
The bank acknowledged there are still arguments for the RBA to delay action until May. The oil shock may fade quickly, and financial markets could become more volatile if geopolitical tensions escalate further. As a result, a split vote at the March policy meeting is possible, with some policymakers preferring to wait for additional data.
However, Westpac said delaying a response is no longer its central scenario.
The bank also highlighted that its longer-term outlook remains broadly unchanged. It expects underlying inflation to move back toward the 2.5% midpoint of the RBA’s target band by late next year, alongside a gradual increase in unemployment and clearer evidence that supply capacity growth is improving.
As a result, Westpac anticipates that the current restrictive policy stance will eventually need to be unwound, though the timing of those cuts has shifted slightly. It now expects easing to begin in November and December 2027, followed by further cuts in February 2028.
The bank added that more frequent adjustments to policy may reflect recent changes to the RBA’s operating framework, including refinements to its mandate and a revised composition of the Monetary Policy Board that may be more comfortable with actively adjusting policy to keep inflation close to the target midpoint.
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WPAC not the only change of call:
RBA next meet March 16 and 17.
