Last week, the Reserve Bank of Australia (RBA) delivered another blow to mortgage holders by increasing the cash rate for a third meeting in a row.
Is this where interest rates peak? Or are there more hikes to come? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is expecting from the central bank.
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The RBA's decision
As mentioned above, on Tuesday of last week, the RBA decided to increase the cash rate target by 25 basis points to 4.35%.
Commenting on the decision, RBA governor, Michele Bullock, said:
As expected, developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.
In light of these considerations, the Board assessed that inflation is likely to remain above target for some time and that the risks remain tilted to the upside, including to inflation expectations. It was therefore judged appropriate to increase the cash rate target.
Where next for interest rates?
Unfortunately for borrowers, Westpac believes that further interest rate hikes will be necessary to tame inflation.
However, Westpac's chief economist, Luci Ellis, doesn't believe that it will be another back-to-back hike. She thinks the RBA will want to pause in June to see how the Middle East conflict plays out. Ellis said:
We still expect two more RBA rate hikes after the one this week. However, as we flagged as a consideration on Tuesday, we now think that the Monetary Policy Board (MPB) will want to pause in June. In the post-meeting media conference, Governor Bullock characterised the three rate hikes so far as dealing with the high inflation issue that already existed before the conflict in the Middle East started, and that this "gives space" for the MPB to see how the conflict plays out.
Together with the dissenting vote, we read this as saying that another back-to-back hike in June is no longer a better-than-50% chance. It is not a zero chance, either, but it should not be the base case.
Westpac is forecasting the next interest rate hike in August, followed by another in September. This will take the cash rate to 4.85%.
For the sake of mortgage holders, here's hoping the RBA won't have to make these moves. But time will tell if that is the case.
