Westpac Economics has updated its forecast for Australian monetary policy, now anticipating that the Reserve Bank of Australia (RBA) will keep interest rates on hold throughout 2026. Despite easing inflation pressures, the RBA remains cautious due to inflation risks.
In a recent research note, Westpac highlighted that the RBA has responded to recent inflation surprises, even though some of these increases were due to temporary factors. While inflation is expected to decline over the course of 2026, Westpac believes the moderation will not be rapid enough to prompt a change in the RBA’s current hawkish stance.
Under Westpac’s forecasts, rate cuts remain feasible but are only expected to occur in 2027, particularly around February or May, provided that inflation and labour market conditions develop as anticipated. The bank emphasises that the RBA will require clear evidence that inflation is sustainably returning to target before considering monetary easing.
Westpac notes risks on both sides of its forecast. A significant worsening of labour market conditions could bring forward the timing of rate cuts to 2026. Conversely, while further rate hikes are viewed as premature, any additional unexpected rises in inflation could pressure the RBA into tightening policy. If another rate increase does occur, Westpac suggests this would likely coincide with downgraded forecasts for economic growth, inflation, and labour market outcomes, thereby heightening the chances of a subsequent policy reversal in 2027.
On the economic front, Westpac observes that the Australian economy is largely performing in line with its expectations. Public-sector demand growth has slowed considerably, turning negative in the first half of 2025, while private-sector demand is showing signs of recovery. The labour market is gradually easing, and underlying labour cost growth is moderating.
Notably, productivity growth is already outpacing the RBA’s conservative trend assumptions, which supports Westpac’s view of 2026 being a year of ongoing recovery following a prolonged period of weak private-sector demand growth.
Westpac also noted that concerns about a “shaky handover”—where private-sector activity fails to pick up as public-sector support fades—have mostly eased.
Original Source: Eamonn Sheridan of investinglive.com
