Next week is going to be a big one for interest rates, with the Reserve Bank of Australia (RBA) scheduled to hold its next monetary policy meeting.
Just a couple of weeks ago, another rate hike at this month's meeting looked unlikely after February's increase, but a sudden spike in oil prices caused by war in the Middle East has changed everything.
In fact, the market believes that there's a strong probability the RBA will lift the cash rate on Tuesday. But will that be the case? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is predicting.
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Will interest rates increase next week?
According to the latest cash rate futures, the market has priced in a 66% probability of a 25 basis point increase to 4.1% next week.
Unfortunately for borrowers, Westpac agrees with the market and expects the RBA to make another move in March.
Even worse, the bank's economics team believes a further increase won't be far behind.
Westpac's chief economist, Luci Ellis, said:
The RBA is now expected to hike the cash rate by 25bp in both March and May; this is a change from our previous view of a single hike in May with further hikes as a risk only. The expected peak cash rate is now 4.35%. The effect of higher oil prices on headline inflation is large but temporary. The RBA Monetary Policy Board will nevertheless feel compelled to react, especially given the hit to confidence and financial markets from the Middle East conflict has so far not been severe.
When will there be some relief?
Westpac believes that the interest rate hikes in March and May will be where it ends. After which, the bank is forecasting cuts in late 2027 and early 2028. Ellis adds:
By the end of next year, underlying inflation will be close to the 2½% target midpoint and unemployment noticeably higher. It will also be clearer that supply capacity growth is above 2% and that labour market slack is building outside the formal labour force. We therefore also shift our expectations of the necessary reversal of tight policy, to November and December 2027 and February 2028 (was November 2027 and February 2028).
This is expected to see the cash rate down to 3.6% by the middle of June 2028.
