Westpac’s chief economist has reaffirmed the bank’s forecast that Australia’s central bank will raise the cash rate by 25 basis points at its May meeting, as inflation data continue to flash warning signs in the wake of the Middle East conflict.
Luci Ellis, chief economist of Westpac Group, published the bank’s assessment on Wednesday, stating the Reserve Bank of Australia’s (RBA) Monetary Policy Board (MPB) was on course to lift the cash rate from 4.10% to 4.35%.
Ellis wrote that inflation had already been running higher than the MPB was comfortable with before the Middle East conflict began, prompting rate rises in both February and March. She noted that the supply shock was compounding existing pressures, with the pass-through to non-fuel prices – including building products and food – already under way.
“Pass-through to other (non-fuel) prices is clearly starting, touching everything from building products to takeaway food,” Ellis wrote.
She also flagged that the RBA’s preferred quarterly trimmed mean measure remained at 0.8% for the quarter – still too elevated for policymakers to overlook, despite coming in slightly below Westpac’s pre-release estimate.
A separate Westpac Economics bulletin published on April 10, authored by senior economist Justin Smirk, painted a broader and more persistent inflationary backdrop, driven largely by the Iran conflict, which Smirk described as the largest energy shock since the oil crises of the 1970s and 1980s.
Westpac’s modelling projected headline consumer price index (CPI) inflation peaking at 5.4% annually in the June quarter, before easing to 4.6% by year’s end. The monthly CPI measure was forecast to peak near 5.8% annually in May. Core inflation, measured by the quarterly trimmed mean, was projected to peak at around 4% annually in the second half of 2026 and not return to 3% until the end of 2027.
In response to these projections, Westpac expects the RBA to deliver three rate rises – in May, June, and August – bringing the cash rate to a peak of 4.85%. The bank noted, however, that the outlook beyond May carries greater uncertainty, with the possibility of fewer hikes should pass-through to non-fuel prices prove more contained than current data suggest.
The projected tightening cycle marks a dramatic turnaround from the monetary policy environment of 2025. The RBA cut the cash rate by 25 basis points to 3.85% in May 2025, following evidence that inflation was continuing to ease, with annual trimmed mean inflation falling below 3% for the first time since 2021. A further cut in August brought the cash rate to 3.6%, its lowest since April 2023, after headline inflation came in at 2.1% for the June quarter.
