RBA Seen Lifting Rate to 17-Year High on Oil Shock, Westpac Says

ov}3qwwujzno8i}y5h14(g6}_media_dl_1.png Reserve Bank of Australia

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(Bloomberg) — Australia’s central bank will likely raise its benchmark rate three more times this year, taking it to more than a 17-year high amid the war in the Middle East and signs that rising fuel costs are feeding into prices, according to Westpac Banking Corp.’s Luci Ellis.

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The firm’s chief economist sees a third straight hike by the RBA in May, followed by increases in June and August, which would lift the cash rate to 4.85% — the highest since late 2008 — from 4.1%. The forecasts align with money market pricing, which also implies a strong chance of three more moves this year.

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“This shift reflects the longer disruption to and slower recovery in fuel supply,” Ellis, who previously worked at the RBA, said in a note released Monday, adding that it also reflects the rapid pass-through of higher fuel and oil-derived costs into other prices in Australia.

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“We believe the RBA will respond to this pricing behavior by tightening monetary policy by more than would have been needed absent that pass-through,” she said.

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Ellis’s forecast revision comes after Australia on Monday announced a temporary cut to a fuel tax as well as a reduction in the heavy road user charge to help households with cost-of-living pressures.

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The halving of fuel excise “reduces the near-term outlook for headline CPI inflation, but a peak of 5.4% y/y in June quarter remains likely,” Ellis said, noting the announcement still does not affect prices of other oil-related products, including aviation fuel and various plastics.

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“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% y/y later this year.”

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The RBA began raising rates in February, even before the Iran war started, as it sought to tame inflation. It delivered its second straight increase this month and cautioned of further tightening, if needed.

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Last week, Assistant Governor Chris Kent warned that the global energy shock driven by the Iran war risks further fueling price pressures in Australia and pushing up inflation expectations at a time of existing capacity constraints.

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Ellis expects the RBA’s higher cash rate path to weigh on Australia’s economic outlook, forecasting unemployment will peak at around 5%, from 4.3% now, while headline inflation dips below 2.5% by mid-2027 and remains in the lower half of the RBA’s target range through to 2028.

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Despite the weaker economic outlook and potential undershoot of the inflation target, Ellis expects the RBA to be slow to reverse its policy tightening “and risks getting behind the curve in coming years.”

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She pushed out the date for rate cuts and penciled in four reductions, one per quarter over 2028.

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