Westpac has revised its cash rate forecast for the remainder of the year, predicting a significant increase to 4.85%, a level not witnessed in Australia since the Global Financial Crisis (GFC) of 2008. This adjustment comes amid ongoing geopolitical tensions in the Middle East, which are exerting substantial pressure on inflation.

The bank anticipates that the Reserve Bank of Australia (RBA) will raise the cash rate in its upcoming meetings in May, June, and August, each time by 0.25 percentage points. Should these predictions come to fruition, mortgage holders across the country will face a cash rate that far exceeds the recent high of 4.35% reached in late 2023.

Westpac’s chief economist, Luci Ellis, attributes this grim forecast to the disruptions in fuel supply caused by the near-closure of the Strait of Hormuz. “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,” Ellis explained. The Strait of Hormuz, a critical waterway between the Persian Gulf and the Gulf of Oman, is responsible for the transit of approximately 30% of Australia’s refined fuel supply. Any prolonged delays or closures in this area could severely impact the already strained petrol supplies.

In an attempt to mitigate the immediate impact on consumers, the government announced earlier this week a halving of the fuel excise, effectively reducing the cost of diesel and petrol by 26.3 cents per litre for the next three months. Despite this measure, Ellis warns that a peak inflation rate of 5.4% in the June quarter “remains likely” due to the oil supply shock’s ripple effects on other sectors. “The announcement also does not affect prices of other oil-related products, including aviation fuel and various plastics, or any price increases from damage to gas and other production facilities in non-combatant Gulf states,” she added.

The trimmed mean inflation, a critical measure used by the RBA to guide cash rate decisions, currently stands at 3.4%. Ellis predicts it will peak around 4% later this year, reflecting the broader inflationary pressures that have persisted well above the RBA’s target band of 2-3% for more than six months.

The anticipated rate hikes are set to compound the financial strain on homeowners with mortgages. A single rate increase could add approximately $80 per month to the repayments on a $500,000 home loan, with cumulative hikes expected to push monthly repayments up by several hundred dollars.

Reserve Bank Governor Michele Bullock acknowledged the challenges faced by mortgage holders, stating that the bank’s recent rate hike is “tough news for people with mortgages.” She noted that the high inflation experienced since 2022 has provided a stark reminder of the consequences when inflation escalates unchecked. “People hadn’t seen high inflation until 2022, and that gave people a taste of what happens when inflation gets a roll on,” Bullock remarked.

The current cash rate of 4.1% is already an eight-month high, reflecting the domestic pressures that had been driving inflation upward even before the outbreak of the Iran War in early March. As the situation unfolds, the financial landscape remains precarious for Australian households, with further rate hikes likely to exacerbate the cost of living pressures.

Westpac’s latest forecast underscores the delicate balance the RBA must maintain in its monetary policy decisions, as it navigates the dual challenges of managing inflation and supporting economic growth amid global uncertainties. Homeowners and investors alike will be closely watching the RBA’s next moves, as the anticipated rate hikes could have far-reaching implications for the housing market and the broader economy.