Reserve Bank set to fail objectives as Westpac forecasts three rises that would take cash rate to 2008 high

Interest rates will soon reach the highest level since the global financial crisis with three more hikes in 2026, the Westpac Bank predicts.

Economists at the big-four bank today said the energy-driven inflation surge was so dire that rate increases will be necessary in May, June and August. On an average, new mortgage of $736,000, the increases would add $366 to monthly repayments.

Unemployment will rise from 4.3 per cent to 5 per cent, hitting levels last seen in late 2021 during COVID lockdowns, the Westpac forecasts show.

The 75 basis points of projected increases would take Reserve Bank of Australia cash rate to 4.85 per cent - the highest level since December 2008 during the Global Financial Crisis.

“The higher cash rate profile will weigh on Australia’s economic outlook,” Westpac chief economist Luci Ellis wrote in a note to customers. “Growth will be slower, especially consumption, and the labour market will be softer.”

Deloitte Access Economics on Monday predicted a 4.9 per cent jobless rate by June, 2027, with inflation peaking at 4.9 per cent mid this year. Next financial year the jobless rate would be 4.7 per cent and inflation around 3.9 per cent, the firm said.

Both would be above the Reserve Bank’s objectives of full employment and low inflation, reviving the economic nightmares Australia suffered in the early 1980s and early 1990s of stagflation, where the jobless level and the consumer price index were simultaneously high.

Inflation, already at 3.7 per cent in February before the US strikes on Iran, is well above the RBA’s 2-3 per cent target.

The forecasts predict the Resereve Bank will simultaneously fail its objectives of maintaining full employment and keeping inflation within the band.

“In that event, they’re not meeting either and at the moment, both are moving further away from their objectives,” Deloitte Access Economics partner David Rumbens told The West Australian.

“So, we’ve got inflation which is above the range and we know on the readings that are to come it’s going to move up quite a lot and the likelihood or expectation is the unemployment rate will also drift up through this year.”

Mr Rumbens said unemployment would have to climb above 6 per cent, during a period of high inflation, for stagflation to be occurring in a 2020s context.

“That would be cause for concern,” he said.

Australia hasn’t had double-digit levels of unemployment since 1994 and double-digit inflation hasn’t occurred at the same time as double-digit unemployment since 1983.

Monthly repayments on a typical new mortgage would climb from $4551 to $4917 as variable mortgage rates surpassed the 7 per cent level, under Westpac’s new RBA interest rate forecasts.

Dr Ellis noted a three-month halving of fuel excise, to 26.3 cents a litre, would not stop inflation peaking at 5.4 per cent by June for the first time in three years, down marginally from the 5.5 per cent level previously forecast before Labor’s Monday announcement on petrol tax relief.

Westpac doesn’t see relief occurring until 2028 for home borrowers, by which time the cash rate is predicted to fall to 3.85 per cent, where it was before the last hike almost a fortnight ago.

“We push out the date for rate cuts and pencil in four rate cuts, one per quarter in February, May, August and November 2028,” Dr Ellis said.