Australian Interest Rate Cuts Postponed to 2027 Amid Rising Inflation Pressures, Westpac Predicts

Key Points Summary:

• Westpac analysts have revised their forecast, now expecting the Reserve Bank of Australia (RBA) to hold interest rates steady through 2026, with potential cuts pushed to early-to-mid 2027.

• Rising inflation, particularly core inflation exceeding the RBA's target, underpins this shift in expectations, prompting a cautious approach from the central bank.

• While the RBA is focused on balancing inflation control and labor market growth, further inflation surprises could necessitate a change in policy direction.

Westpac has adjusted its outlook on Australian interest rates, indicating that the Reserve Bank of Australia (RBA) is unlikely to cut rates in 2026. The bank's analysts noted that although inflation is expected to ease, pervasive price pressures will likely keep the RBA in a hawkish mode, discouraging any rate cuts in the near future.

The central bank has maintained its policy stance after keeping rates steady in a recent meeting, where Governor Michele Bullock emphasized concerns about inflation that could delay any easing. Westpac now forecasts that rates will remain stable throughout 2026 but may see cuts initiated in early to mid-2027, following approximately 75 basis points of reductions enacted during the previous year.

This updated forecast is heavily influenced by a resurgence in inflation, particularly core inflation, which has climbed back above the RBA's target range of 2% to 3% in the latter half of 2026. While Westpac anticipates that inflation will eventually return to the RBA's target range, this is expected to occur later in the year, further solidifying the central bank's resolve to keep rates unchanged for an extended period.

Moreover, a significant tightening in the labor market could prompt the RBA to reconsider its rate-cutting timeline. The RBA’s primary objective remains navigating the fine line between reducing inflation and fostering healthy labor market growth.

Westpac Chief Economist Luci Ellis highlighted that persistent inflationary pressures in the latter part of December or early 2026 could complicate the RBA's stance; however, if the bank’s inflation forecasts are realized, significant policy shifts remain improbable. Ellis also pointed out that any immediate interest rate increases could hinder short-term growth and labor market expectations, likely leading to a reversal of such tightening measures by 2027.