Westpac sees RBA holding firm through 2026 as inflation risks linger. Cuts seen in 2027.

SummaryWestpac now expects the RBA to hold rates through all of 2026Inflation is easing, but not fast enough to change the RBA’s stanceRate cuts remain feasible in early 2027 under current forecastsLabour-market deterioration could shift timing earlierPrivate-sector recovery reducing downside growth risksWestpac Economics has revised its outlook for Australian monetary policy, now expecting the Reserve Bank of Australia to keep the cash rate on hold throughout 2026 as it remains wary of inflation risks despite signs of easing price pressures.In a research note, Westpac said the RBA has clearly taken signal from recent upside inflation surprises, even while acknowledging that some of those outcomes reflected temporary factors. Inflation is expected to moderate through 2026, but not quickly enough, in Westpac’s view, to persuade the central bank to soften its still-hawkish risk assessment.On current forecasts, Westpac continues to see scope for rate cuts, but only in 2027, with February and May identified as the most likely windows if inflation and labour-market dynamics evolve as expected. The bank argues the RBA will need clearer evidence that inflation is sustainably returning to target before easing policy.Westpac flagged risks on both sides of its base-case outlook. A material deterioration in labour-market conditions could reopen the possibility of rate cuts being pulled forward into 2026. However, the bank considers talk of further rate hikes premature, despite acknowledging that additional near-term inflation surprises could unsettle the RBA and prompt a tightening move.Should such a hike occur, Westpac said it would likely require a downward revision to forecasts for economic growth, medium-term inflation and labour-market outcomes, increasing the probability of a subsequent policy reversal in 2027.More broadly, Westpac argues the Australian economy is evolving largely in line with its expectations. Public-sector demand growth has slowed sharply and was negative in the first half of 2025, while private-sector demand has begun to recover. The labour market is gradually easing, and underlying growth in labour costs is moderating.Encouragingly, productivity growth is already running faster than the RBA’s conservative trend assumptions, according to Westpac. As a result, the bank sees 2026 as a year of continued recovery from a prolonged period of weak private-sector demand growth.Westpac added that concerns around a “shaky handover”, where private-sector activity fails to pick up as public-sector support fades, appear to have largely dissipated.
This article was written by Eamonn Sheridan at investinglive.com.

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