Economist delivers grim interest rate prediction on the back of another hike

The pain for homeowners still reeling from a third straight interest rate hike won't end here, an economist has warned.

Tuesday's decision from the Reserve Bank of Australia to raise the cash rate by 25 basis points to 4.25 per cent was the third hike this year, all but erasing the cuts that Australia welcomed last year. 

Bendigo Bank head of economic research David Robertson blamed the Middle East conflict for another rate hike being all but inevitable, while warning it might even come faster than expected.

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"Albeit at a faster pace than originally forecast, we can expect another hike to 4.6 per cent later in the year," he said.

"While this is a remarkable U-turn from just six months ago, rising inflation has clearly been exacerbated by the Middle East war, which is compounding pressures that had already emerged ahead of the historic disruption to the global oil supply."

Robertson said general economic forecasts were not completely obsolete – predicting recovery at the back end of this year and start of next year – but admitted it hinged strongly on how the situation in the Middle East played out.

"Australia remains entirely at the mercy of the duration of the Middle East conflict, which remains uncertain, with a range of scenarios being contemplated," he said.

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"Financial markets are still assuming a quick resolution, but the number of ships getting through the Strait of Hormuz is yet to increase.

"Attempts by US forces to escort ships through the Strait have been mixed, with the best benchmark of success being the price of oil, which is still expected to peak in the short term."

He said Treasurer Jim Chalmers faced a daunting task as he prepared to hand down the federal budget next week.

"The government faces the task of supporting Australian households without adding to inflation, while simultaneously needing to improve productivity in our economy, all in a fiscally responsible manner," Robertson said.

"This will be quite the challenge."

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