Fuel-driven inflation sparks warning for Australian home borrowers facing three interest rate rises in 2026

Australian home borrowers are now facing three more interest rate hikes in 2026 as soaring fuel prices worsen an already bad inflation situation and spook financial markets into fearing the highest mortgage costs in 15 years.

The futures market is now rating an increase from the Reserve Bank of Australia on Tuesday at a 68 per cent chance, that would add $120 to typical monthly mortgage repayments.

The big four banks are also expecting a 25-basis point rate rise tomorrow that would take the RBA cash rate back to 4.1 per cent for the first time since May last year.

Three rate rises in 2026, as the futures market is also forecasting, would see the RBA cash rate hit a 15-year high of 4.6 per cent and add $361 to monthly repayments on an average new mortgage of $736,000.

Over the year, that would add up to $4332 in extra repayments as variable mortgage rates went from starting with a five to levels closer to seven per cent.

Soaring petrol prices since the start of the Iran war, little more than two weeks ago, now have the futures market predicting three rate more hikes in total this year instead of two increases.

With crude oil prices now back above $US100 a barrel ($143), traders are particularly concerned about headline inflation, now at 3.8 per cent, climbing closer to 5 per cent.

This would put it even further away from the RBA’s 2-3 per cent target and revive the consumer price pressures of 2023 when the Reserve Bank was last repeatedly raising interest rates.

“The market is nervous about whether the RBA will have to respond more aggressively in the case of an unanchoring of inflation expectations coming from fuel prices,” Barrenjoey chief interest rate strategist Andrew Lilley told The Nightly.

“About 10 days ago, market pricing started moving in response to the oil price shock.”

Market pricing for a Tuesday rate hike, on the 30-day interbank futures, began firming late last week after the Brent price of crude oil hit $US120 a barrel, reaching levels last seen in mid-2022 after Russia’s Ukraine invasion sparked sanctions.

“That’s when the market started worrying about the inflation risks and that’s been the MO for the past week,” Mr Lilley said.

“All fixed-income investors worried about how central banks are going to see this inflation risk because no major country’s central bank really brought inflation back to their target so the worry is they’ll have to pay for past sins.”

The Reserve Bank would also be worried about higher inflation leading to demands for higher wages, economist Anthony Malouf from foreign exchange payments group Ebury said.

“Higher inflation just becomes entrenched and people will then go, ‘Hang on, prices are going to be running higher, I want a higher wage to match these prices’ so then input costs for businesses rise and then it’s just a constant spiral,” he told The Nightly.

“That’s what the RBA doesn’t want. You don’t want to run that risk. That’s a dangerous game to be playing.”

Higher mortgage repayments would be on top of higher petrol prices with average unleaded petrol soaring from $1.80 a litre before the US-led air strikes on Iran to $2.30 now in most capital cities.

Filling up a Toyota RAV4 SUV now costs $27.50 more than it did only three weeks ago.

A family filling up their car once a week would now be paying $1430 more over the year.

Wholesale fuel prices have soared since the US-led strikes on Iran at the end of February.

The terminal gate price of diesel in Melbourne has soared by 57.5 per cent, from $1.65 a litre to $2.60 a litre as of Monday, Australian Institute of Petroleum figures show.

In the Victorian capital, motorists are now typically paying $2.67 a litre for diesel.

Higher fuel prices, acting like a tax on consumers, were more likely to see the RBA keep rates on hold on Tuesday, Mr Malouf said, adding the RBA could impose a potentially bigger 50 basis point hike in May.

“If things worsen, on the inflation front, there could be that chance that they could go 50 basis points in May if they needed to but that is not my base case,” he said.

Iran’s blockade of the Strait of Hormuz is stopping crude oil from the Gulf states getting to the Asian refineries that supply 80 per cent of Australia’s petrol, diesel and jet fuel.

This saw the International Energy Agency last week release 400 million barrels of oil to member countries.

But US Energy Secretary Chris Wright on Sunday night suggested the conflict with Iran was likely to last for several more weeks.

Oil and petrol prices were “expected to remain elevated,” ANZ economists said in a note on Monday morning.