Westpac's economics team has updated its monetary policy forecast, saying the Reserve Bank of Australia (RBA) is likely to hike the cash rate by 25 basis points at its March policy meeting and to follow with a further 25 basis point increase in May. The revised projection pushes the expected peak cash rate to roughly 4.35%.
Previously, Westpac's base case had been for a single RBA rate rise in May, with additional tightening treated as a risk scenario rather than the central forecast. The change in view reflects two linked developments highlighted by the bank: a recent jump in oil prices and comments from RBA officials pointing to ongoing concerns about the economy's supply capacity.
Westpac economists warn that a spike in oil costs could temporarily lift headline inflation, creating pressure on the RBA monetary policy board to act in order to prevent a deterioration in inflation expectations. Luci Ellis, chief economist at Westpac, wrote that: "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 has so far not been severe."
The bank says that even as some data point to more moderate underlying inflation pressures, RBA communications suggest policymakers remain wary of weak growth in supply capacity - a factor that can sustain inflationary pressures even when headline measures are volatile.
While Westpac now treats a March rate increase as the base case, it also notes that the timing could shift. If market instability accelerates or if oil prices decline sharply, the RBA might postpone any near-term move until May. That conditionality is central to Westpac's updated outlook.
Implications and context
The forecast change highlights how commodity price shocks - in this instance oil - and central bank communication around supply constraints can interact to influence policy expectations. Financial markets and confidence are noted explicitly as transmission channels that could shape the board's decision-making.