Australian mortgage holders could be in for more bad news next week when the Reserve Bank of Australia (RBA) meets to decide on interest rates.
With inflation remaining stubbornly high, many in the market believe another increase is on the way.
In fact, the ASX 30 day interbank cash rate futures currently indicate an 80% expectation of an increase to 4.85% on Tuesday.
But will that be the case? Let's see what Westpac Banking Corp (ASX: WBC) is expecting.
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Will the RBA increase interest rates?
According to a note from Westpac's chief economist, Luci Ellis, she believes the central bank will be forced to lift rates next week.
Westpac is forecasting a 25 basis point increase, believing that the latest inflation figures have strengthened the case for another hike.
In case you missed it, on Wednesday, the Australian Bureau of Statistics (ABS) revealed that annual inflation increased to 4.3% in September. This is up from 4% in August. Underlying inflation also remained elevated at 3.6%.
These figures are well above the RBA's target range of 2% to 3%, raising concerns that inflation could remain high for longer than previously expected.
Commenting in the latest Westpac Weekly economic report, Ellis said:
We reaffirm our expectation that the RBA Monetary Policy Board will again increase the cash rate at the November meeting. Today's inflation data and Senate testimony are the final pieces of information before the RBA Monetary Policy Board (MPB) meets next week. Recent data and communication have consistently pointed to the staff recommending an increase in the cash rate. We expect a majority of the external members to agree, though some members might dissent.
Inflation is above target, and above what the RBA's August forecasts implied. Some upside risks identified in August have partially materialised, particularly energy prices. The RBA is especially worried that above-target inflation will become embedded in people's expectations and pricing decisions. It will therefore deem that further policy tightening is needed.
What happens to interest rates after November?
There could be some better news for mortgage holders beyond next week's meeting.
While Westpac expects an interest rate hike in November, it doesn't currently believe further increases will be necessary.
However, Ellis warns that the risk of another increase, potentially in February, has grown.
Much will depend on inflation over the coming months, particularly with the conflict in the Middle East creating uncertainty around energy prices.
If oil prices increase further, inflation could remain elevated and force the RBA to consider additional tightening.
On the other hand, easing energy prices or a deterioration in global economic conditions could reduce the need for further increases.
For now, Westpac believes the RBA will continue taking a tough stance on inflation until there is clearer evidence that price pressures are easing.
So, while another interest rate hike next week looks increasingly likely, mortgage holders will be hoping Westpac is correct that it could be the last one for some time.
After which, the bank is predicting an easing cycle commencing from mid-to-late 2027.
