Westpac has issued a fresh forecast indicating that mortgage holders in Australia may face three more interest rate hikes throughout 2024, specifically in May, June, and August. If these predictions hold true, the cash rate could rise to 4.85%, a peak not seen since November 2008 during the global financial crisis (GFC).
The bank highlights that escalating geopolitical tensions, notably the ongoing conflict in the Middle East, coupled with rising fuel prices, are likely to exert upward pressure on inflation, which is projected to reach 5.4% by the June quarter. Westpac’s chief economist, Luci Ellis, attributed this expected rise to prolonged disruptions in fuel supply and the rapid transmission of increased fuel costs to other sectors within the economy.
Ellis stated, “The RBA is likely to respond to this pricing behaviour by tightening monetary policy more than it would have otherwise.” Although the Australian government’s decision to halve the fuel excise is anticipated to provide some temporary relief from inflation, the overall outlook remains concerning. The trimmed mean inflation rate is predicted to peak at around 4% later in the year, largely because reduced fuel excise will not significantly alleviate prices for other oil-dependent products, such as aviation fuel and plastics.
As of now, headline inflation stands at 3.7%, whereas trimmed mean inflation is at 3.3%. However, these figures precede the escalation of conflict in the Middle East, which has influenced global oil prices. The projected increases in the cash rate are likely to add strain to Australia’s economic prospects, with Ellis warning of reduced consumption and a softened labour market. She foresees the unemployment rate potentially climbing to approximately 5%, up from an earlier estimate of 4.7%.
According to Westpac’s forecasts, while headline inflation could dip below the RBA’s 2.5% target by mid-2027, it is unlikely that the central bank will lower interest rates before February 2028. Some experts, such as Canstar’s insights director, Sally Tindall, echo Westpac’s predictions, noting that should their forecast come to fruition, monthly repayments on a $600,000 mortgage with 25 years remaining could rise by approximately A$276 per month due to the additional interest rate hikes. Including the hikes that have already occurred this year, total repayments could increase by A$457 per month by August.
Tindall further warned that “mortgage holders may face tough financial conditions over the next couple of years,” citing the more aggressive trajectory predicted by Westpac compared to other big banks, which suggest only one additional hike.
The ripple effects of higher fuel costs are already being felt across various sectors, compelling the RBA to consider action; once prices elevate, they rarely revert to previous levels. Although the government’s attempt to alleviate pressure through fuel excise reductions may provide temporary relief, ongoing increases in the cash rate could create a cycle of escalating costs.
Tindall cautioned that while these predictions are not yet final, they underscore the importance of preparing one’s financial situation for potential shifts in the economic landscape.
In summary, Westpac’s forecast paints a challenging picture for Australian mortgage holders and the broader economy, with anticipated interest rate hikes that could lead to sustained financial hardship for many households in the near future.
