ANZ Bank on Thursday became the latest major lender to change its prediction for the Reserve Bank's March meeting, after CBA, Westpac and NAB revised their calls on Wednesday.
Australia's economy was already running too hot for the RBA's liking, and the Middle East conflict was likely to send inflation even higher, ANZ economists Adam Boyton and Adelaide Timbrell said in a research note.
"The increased inflation risks will exacerbate those inflation concerns, creating more urgency to move quickly to contain inflation expectations," they said.
"Inflation expectations in the ANZ-Roy Morgan Australian Consumer Confidence data are at their highest level since November 2022."
The big four banks expect the RBA to lift the cash rate a further 25 basis points to 4.35 per cent in May, which would make for three hikes in a row if their predictions for next week also bear out.
Each 25 basis point hike adds about $90 in monthly repayments to a typical owner-occupier mortgage of $600,000.
Once the cash rate gets to 4.35 per cent, ANZ expects the RBA to go on an extended pause to assess the impact of higher rates on the economy.
"At this stage, the activity impacts on the economy will become more important," Mr Boyton and Ms Timbrell said.
"There are already signs that the consumer spending impulse has slowed this year, and this may slip further given the dip in consumer confidence in recent weeks."
Household spending fell for the first time since September 2024, according to Commonwealth Bank's Household Spending Insights index for February, revealing that month's rate rise may already be taking a toll on consumers.
CBA head of Australian economics Belinda Allen said it was still too early to tell if this was coincidence or the start of a slowing trend in household consumption growth.
"More modest consumption growth will be needed to help bring the economy back into balance and inflation back to target," she said.
"Rising energy prices will add to inflation and constrain household incomes this year and do add a downside risk to the outlook."
Rising interest rates will also put a dampener on consumption, with money markets almost fully priced in for three more hikes by the end of 2026 to leave the cash rate at 4.6 per cent - the highest level since October 2011.
"The escalating turmoil from the Middle East conflict and surging energy prices is poised to tighten its grip on Australian households, amplifying cost-of-living pressures at a time when inflation remains sticky," IG market analyst Tony Sycamore said.
"Following this week's jump in consumer inflation expectations - now at multi-year highs alongside hawkish commentary from RBA deputy governor Andrew Hauser - Australian rates markets continue to reprice aggressively towards additional tightening."
That has sent the Aussie dollar to fresh highs against its US counterpart, although it retreated to US71.25c by Thursday afternoon as high energy prices and safe-haven demand supported the greenback.
But the longer the war goes on and energy supplies were disrupted by the closure of the Strait of Hormuz, the worse the prospects were for the Aussie dollar, NAB head of FX research Ray Attrill said.
Australia is a net exporter of energy, so is seen as better placed than other countries to deal with rising oil and gas prices.
But the Aussie dollar was also a risk-sensitive currency, vulnerable to sell-offs in global equity markets, he said.
In an extreme risk-off scenario, Mr Attrill predicts the Aussie could fall as low as 65c against the US dollar, but his base case scenario remains for it to stay in the low 70s throughout 2026.
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