Westpac Market Outlook March 2026
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook March 2026' (PDF 3MB)
This edition of Market Outlook is going to press almost exactly two weeks since the US and Israel launched strikes on Iran. The situation is highly dynamic and uncertain. For markets and economies, the main focus is on damage to the region’s critical energy infrastructure, the closure of the Strait of Hormuz and the risk of further escalation. Crude and other energy prices have spiked and are tracking an extremely volatile path day to day.
The conflict has triggered a sell-off in equities, a rise in bond yields and an appreciation of the US dollar. However, the moves have been relatively mild ones in the scheme of things. This appears to be coming from the ‘TACO’ – Trump Always Chickens Out – working assumption that has prevailed since last year’s ‘liberation day’ tariff turmoil.
The scope for a swift TACO-style reversal may be more limited for the current conflict. That said, the US administration has shown a clear desire to avoid a drawn-out campaign, especially one that might lead to the dreaded quagmires that have dogged US interventions in the past. Page 9 sets out several scenarios including the ‘base case’ we are using for our forecasts – a one month conflict followed by a one month normalisation that results in a relatively mild and mostly temporary shock to growth and inflation.
All of this points to a more uncertain and volatile environment with lower growth and higher inflation. This presents major challenges for central banks. Their assessments will likely be similar to ours but judging what constitutes the ‘path of least regret’ for policy will depend on how decisions were being framed prior to the shock, assessments of relative exposures, and the balance of risks around both inflation and growth.
For the RBA, the recent focus has been on returning inflation to target, with some lift in rates required to bring growth more into line with its (downbeat) assessment of the economy’s supply capacity. Risk-wise, the upside threat to inflation, and especially inflation expectations, will be the over-riding concern. Hence, we now expect an additional 25bp rate hike at the RBA’s March meeting, ahead of the hike already forecast for May, bringing the cash rate back to its previous peak of 4.35%.
Australia: The Australian economy ended 2025 on a strong note, growing by 0.8% in the December quarter and 2.6%yr. This was the fastest year-ended pace since the March quarter 2023, albeit still well below previous peaks and coming off two very weak years. The National Accounts reinforced the view that the economy is in a cyclical upswing that is broadening.
Commodities: The crisis in Iran has created major disruptions for commodities, with the spread of conflict to Gulf states and the closure of the Strait of Hormuz to shipping seeing sharp spikes in crude (+41%) and LNG (+56%) prices since our February report. There are significant uncertainties regarding the length of the disruptions, but for now we expect a near term resolution limiting the spike in crude to around US$110/bbl with a June quarter average of US$90/bbl and an end-June estimate of US$85/bbl. While short-lived, this shock is not insignificant, lifting our 2026 average by 20% to US$79/bbl.
Global FX Markets: US dollar strength has been limited amid recent stress, highlighting the potential negatives for the entire developed world. Absent extreme stress, the US dollar’s trend depreciation is expected to begin again soon.
New Zealand: The New Zealand economy showed growth momentum in 2025 and into early 2026 despite volatility in the quarterly data. The Middle East conflict and rising oil prices have introduced new challenges, but even with inflation expected to run at the top of the RBNZ’s target range, the existing degree of spare capacity in the economy means the RBNZ is not under immediate pressure to start normalising policy settings.
United States: Recent developments highlight the delicate balancing act ahead for the FOMC. The February jobs report re-wrote labour market expectations. While the joint US/Israel strike on Iran has sparked fears of yet another inflation threat.
China: China’s economy faces a myriad of risks as 2026 begins. Domestically, the housing sector is deep in recession and the consumer extremely cautious. Offshore, China’s access to energy is threatened, and global growth at risk.
Asia: Concerns over Japan’s bond market and Prime Minister Takaichi’s fiscal package overlook major improvements in Japan’s fiscal and economic fundamentals. Despite a large stimulus, Japan’s primary deficit is smaller than peers’, debt‑to‑GDP is falling, and sustained inflation is now eroding nominal debt. Fears around excess JGB supply are overstated given gradual BoJ tapering, domestic investor dominance and issuance flexibility. As a result, JGB risk premia should fade, with 10‑year yields drifting back toward 2.0%.
Europe & UK: Against the backdrop of rising energy prices, the ECB is expected to remain cautious, monitoring inflation risks, while the BoE is likely to delay further rate cuts until the end of the year, when inflationary pressures become clearer.
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