Interest rates: NAB sees relief for mortgage holders in 2027 amid oil crisis

Australian home borrowers are in for a bad year but a major bank is forecasting relief in 2027 as the Middle East oil crisis pushes unemployment to levels last seen during COVID lockdowns.

While National Australia Bank sees the Reserve Bank raised interest rates again on May 5, it sees relief coming next year with two rate cuts.

This would occur as unemployment soared from 4.3 per cent now to a six-year high of 4.8 per cent in 2027, reaching levels last seen in late 2021 when Sydney and Melbourne were in COVID lockdowns.

Over coming months, the oil crisis is set to push up inflation as crude oil prices stay above $US100 a barrel.

NAB is expecting the consumer price index to climb from an already-high 3.7 per cent to 4.3 per cent, putting it even further above the RBA’s 2-3 per cent target.

But a slowdown in economic growth would see inflation fall to 2.3 per cent next year, putting it on the low side of the RBA’s mid-point.

In those circumstances, NAB economists see the Reserve Bank cutting the cash rate from 4.35 per cent to 3.85 per cent in 2027 - taking it back to where it was last month before the latest rate hike.

“We see the cash rate on hold for an extended period before the RBA begins to normalise rates from mid-to-late 2027,” they said.

The RBA has so far raised rates twice in 2026 and an expected hike next month would mark the third increase.

Tighter monetary policy was expected to slow down gross domestic product growth which would “be sufficient to ensure inflation returns to the mid-point of the 2-3 per cent target band over a reasonable time period,” NAB said.

“This is despite an even less favourable forecast trajectory for inflation and overall financial conditions which have not tightened much since the RBA March meeting.”

A resolution between the US and Iran over the Strait of Hormuz could shift the RBA’s focus to higher inflation and even more rate hikes in 2026 as cheaper fuel prices led to more consumer spending.

“If key shipping channels reopen soon then the RBA may tilt to worrying more about inflation and less about growth as the growth slowdown proves more shortlived in nature while inflation remains sticky and elevated,” NAB said.

“This scenario could result in a higher terminal cash rate than we currently forecast.”

But a continuation of Iran’s blockade in the Middle East’s key shipping channel would see the Reserve Bank worry more about constrained economic growth.

“In the event conflict resumes, supply of oil remains constrained and supply shortages across a range of goods adversely impacts growth outcomes,” NAB said.

“Perhaps in this scenario, the more relevant issue for consideration is whether the RBA could pivot quickly to a more dovish stance as growth impacts become more consequential.”

The futures market is rating a hike in May as a 69 per cent chance.