Rates could hit 18-year high as Middle East war, fuel crisis continue

Interest rates could peak at an 18-year high in a matter of months, according to modelling from one of Australia's biggest banks.

Westpac, citing the continuing war in the Middle East and high oil prices, is now forecasting mortgage holders will be hit by three more rate hikes – in May, June and August – after already having two to start 2026.

That is two more cash rate increases than previously predicted.

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Interest rates have already risen from 3.60 per cent at the end of 2025 to 4.15 per cent, but with three more hikes they would hit 4.85 per cent in August – a level that hasn't been reached since late 2008.

Westpac chief economist Luci Ellis said even government measures like halving the fuel excise, announced today, may not halt the inevitable.

"This shift reflects the longer disruption to and slower recovery in fuel supply assumed… with the Strait of Hormuz essentially closed for eight weeks and traffic recovering only slowly after that," she said.

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"It also reflects the surprisingly rapid pass-through of higher fuel and other oil-derived product prices into other prices in Australia.

She said she felt the Reserve Bank of Australia (RBA) would have no choice but to pass on the pressure to millions of Australians in the form of a rate rise.

She said the fuel excise would reduce the short-term outlook for headline inflation, but she still said it was likely to peak at 5.4 per cent.

Inflation currently sits at 3.7 per cent, although the latest figures are for February and therefore don't take into account the economic shock caused by the Middle East conflict.

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"The (fuel excise) announcement also does not affect prices of other oil-related products, including aviation fuel and various plastics, or any price increases from damage to gas and other production facilities in non-combatant Gulf states," Ellis said.

She also said the cash rate rising could lead to higher unemployment, up to five per cent, and that Australia's economic growth would most likely slow.

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