The Reserve Bank of Australia (RBA) may not be finished lifting interest rates.
Westpac Banking Corporation (ASX: WBC) now believes the central bank could raise the official cash rate three more times over the next few months, with expected increases in May, June, and August.
If that happens, the cash rate would climb to 4.85%, which would be a major jump from where it sits today.
The big reason is the recent surge in oil prices, which is now starting to push up costs right across the economy.
That is why economists now think the RBA may need to lift rates more than once from here.
Westpac now expects several rate hikes
The biggest change in Westpac's view is that it no longer sees this as a one-off rate rise.
Chief economist Luci Ellis has lifted her forecast from one hike to three, saying the jump in fuel prices is spreading much faster than expected.
At first, higher oil prices mainly show up at the petrol pump.
The bigger issue is how those costs spread through other industries.
More expensive fuel also means higher transport costs, rising freight bills, more expensive flights, and bigger costs for businesses that rely on plastics, packaging, and manufacturing.
Those higher costs often end up being passed on to customers through higher prices.
That is what worries the RBA.
If price increases start spreading through lots of parts of the economy, inflation becomes much harder to bring back under control.
That could force the central bank to keep lifting rates.
Why rising oil prices are becoming a bigger inflation issue
The main issue is the ongoing disruption around the Strait of Hormuz, which remains one of the world's most important oil shipping routes.
Because the supply problems are lasting longer than first expected, oil prices have stayed high.
That is now starting to affect much more than just petrol prices.
While the government's fuel excise cut may help drivers a little, it does not reduce higher costs for airlines, freight companies, manufacturers, and many businesses that use oil-based products.
That means inflation could rise again in the June quarter.
Westpac now expects inflation to reach 5.4%, which is far above the RBA's target range.
If that happens, the central bank may decide it has no choice but to keep raising interest rates until price pressures start easing.
Foolish takeaway
Westpac's new forecast suggests the next rate rise may not be the end of the story.
Instead, the RBA may need to keep tightening policy if higher oil prices continue flowing through to everyday goods and services.
For households, that would mean more pressure on mortgage repayments and less room in family budgets.
Further increases would also add pressure to consumer spending, retailers, and other interest-rate-sensitive ASX sectors.
At this point, the interest rate outlook has become one of the market's main concerns this year.
The post Westpac warns the RBA may need to hike rates again appeared first on The Motley Fool Australia.
Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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