Westpac has sharply revised its interest rate outlook, warning that a deeper energy shock from the Middle East conflict will force the Reserve Bank of Australia (RBA) into a more aggressive tightening cycle.
Furthermore, Westpac has pivoted to a higher-for-longer stance unlikely to go down well with mortgage holders.
Westpac now expects three 25-basis-point hikes in quick succession – in May, June and August – taking the cash rate peak to 4.85%. That marks a clear shift from its earlier guidance, which had pencilled in a lower peak and earlier cuts. The rethink is driven by a bleaker assessment of the global supply shock.
Westpac's revised baseline assumes the Strait of Hormuz is effectively shut for around eight weeks, with shipping only gradually normalising thereafter. The result is a longer disruption to fuel supply and a slower recovery, feeding through into sustained higher prices for petrol and other oil-derived products.
Critically, Westpac notes that the pass-through of higher fuel and input costs into broader Australian prices has been faster and more pervasive than expected.
Rather than being contained at the bowser, the spike in energy costs is increasingly evident across transport, manufacturing and goods reliant on plastics and other petroleum-based inputs. That, the bank argues, will push the RBA to lean harder against inflation than it otherwise would have.
A higher cash rate profile will weigh on growth, with consumption in the firing line and a softer labour market ahead. Westpac now expects unemployment to top out near 5%, up from the 4.7% peak it projected just a week prior. While the bank's forecasts show headline inflation slipping below 2.5% by mid-2027 and staying in the lower half of the 2-3% band thereafter, it does not expect the RBA to rush to unwind its tightening.
Rate cuts are pushed out to 2028, with only four moves – one per quarter – tentatively pencilled in for that year.
Westpac's scenario of three more cash rate hikes and a higher peak of 4.85% all but guarantees that mortgage costs will rise further and stay elevated for longer.
Variable borrowers are already feeling the squeeze as the majors pass through the RBA's latest move.
CBA, NAB and ANZ have lifted variable rates by 25 basis points, with CBA's owner-occupier Simple Home Loan jumping from 5.84% to 6.09% and ANZ's Simplicity PLUS moving from 5.89% to 6.15%, while Westpac and Macquarie will follow this week. Canstar estimates the average variable rate will sit around 6.01% once the dust settles.
Fixed-rate mortgages are also climbing. ING has hiked fixed P&I rates by 35 basis points, taking its three‑year fixed to 6.24%, Macquarie has matched the 35‑point rise, and CBA has lifted fixes by 30 basis points. Those moves reflect markets pricing in precisely the kind of higher‑for‑longer cash rate profile Westpac is now forecasting.
Roy Morgan data show about one in four mortgage holders – 1.32 million people – were "at risk" of mortgage stress even before the most recent hikes, with that share tipped to climb above 30% if the cash rate reaches 4.35%.
With banks now starting to predict an even higher terminal rate, mortgage stress is likely to worsen.