Westpac warns the RBA may need to hike rates again

Westpac now expects the RBA to lift rates three more times this year.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Reserve Bank of Australia (RBA) may not be finished lifting interest rates.

Westpac Banking Corporation (ASX: WBC) now believes the central bank could raise the official cash rate three more times over the next few months, with expected increases in May, June, and August.

If that happens, the cash rate would climb to 4.85%, which would be a major jump from where it sits today.

The big reason is the recent surge in oil prices, which is now starting to push up costs right across the economy.

That is why economists now think the RBA may need to lift rates more than once from here.

Percentage sign on a blue graph representing interest rates.

Image source: Getty Images

Westpac now expects several rate hikes

The biggest change in Westpac's view is that it no longer sees this as a one-off rate rise.

Chief economist Luci Ellis has lifted her forecast from one hike to three, saying the jump in fuel prices is spreading much faster than expected.

At first, higher oil prices mainly show up at the petrol pump.

The bigger issue is how those costs spread through other industries.

More expensive fuel also means higher transport costs, rising freight bills, more expensive flights, and bigger costs for businesses that rely on plastics, packaging, and manufacturing.

Those higher costs often end up being passed on to customers through higher prices.

That is what worries the RBA.

If price increases start spreading through lots of parts of the economy, inflation becomes much harder to bring back under control.

That could force the central bank to keep lifting rates.

Why rising oil prices are becoming a bigger inflation issue

The main issue is the ongoing disruption around the Strait of Hormuz, which remains one of the world's most important oil shipping routes.

Because the supply problems are lasting longer than first expected, oil prices have stayed high.

That is now starting to affect much more than just petrol prices.

While the government's fuel excise cut may help drivers a little, it does not reduce higher costs for airlines, freight companies, manufacturers, and many businesses that use oil-based products.

That means inflation could rise again in the June quarter.

Westpac now expects inflation to reach 5.4%, which is far above the RBA's target range.

If that happens, the central bank may decide it has no choice but to keep raising interest rates until price pressures start easing.

Foolish takeaway

Westpac's new forecast suggests the next rate rise may not be the end of the story.

Instead, the RBA may need to keep tightening policy if higher oil prices continue flowing through to everyday goods and services.

For households, that would mean more pressure on mortgage repayments and less room in family budgets.

Further increases would also add pressure to consumer spending, retailers, and other interest-rate-sensitive ASX sectors.

At this point, the interest rate outlook has become one of the market's main concerns this year.

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Economy

Five stacked building blocks with green arrows, indicating rising inflation or share prices
Economy

RBA's 'worst nightmare': What exactly is stagflation?

Stagflation is the RBA's worst nightmare, but what exactly is it?

Read more »

A young woman wearing a blue and white striped t-shirt blows air from her cheeks and looks up and to the side in a sign of disappointment.
Economy

Interest rate rise expectations firm on jobs data as Aussie dollar hits 4-year high

The ASX 200 is in the red despite a partial rebound after March jobs data was released this morning.

Read more »

Man with a hand on his head looks at a red stock market chart showing a falling share price.
Share Market News

Why did the ASX 200 just plunge 1.4% in Thursday afternoon trade?

ASX 200 investors were hit with unpleasant news during the Thursday lunch hour.

Read more »

A woman in a red dress holding up a red graph.
Economy

Three ASX 200 stock picks to consider now, to drive gains as markets and the gold price recover

Is it time to buy the dip?

Read more »

A businessman sits cross legged on the sand in front of a sign that says SOS with his brief case beside him.
Economy

Wall Street just suffered its worst quarter in years. Is the ASX 200 next?

Wall Street’s worst quarter in years is now hitting ASX shares.

Read more »

The word crisis attached to a pointing down red arrow.
Economy

ASX 200 sinks deeper as oil shock sparks fresh recession fears

High oil prices are now becoming a bigger threat to ASX shares.

Read more »

Inflation written on a coffee mug with coins in it.
Share Market News

ASX 200 jumps as inflation surprises to the downside

ASX 200 investors are celebrating the dip in February inflation. But what will March bring?

Read more »

Concept image of a businessman riding a bull on an upwards arrow.
Share Market News

The ASX 200 is roaring back on Tuesday. Here's why

The ASX 200 is surging higher today. But why?

Read more »