Westpac pushes back on RBA hike calls, sees rates on hold through 2026

Westpac's Contradiction on RBA Rate Hike Outlook

Westpac Economics asserts that the Reserve Bank of Australia (RBA) is unlikely to raise rates until 2026, standing against growing market expectations for renewed tightening. While Citi and NAB predict rate hikes in 2026, Westpac argues that recent inflation strength stems from administered prices rather than revived domestic demand or labor market pressures.

Inflation Projections and Economic Conditions

Inflation is expected to dip below the midpoint of the 2-3% target band late next year; however, Westpac believes it comes too late to justify any rate cuts next year. Public sector demand is slowing, private sector activity is recovering, and the labor market is easing instead of tightening. Productivity growth also surpasses RBA's conservative assumptions, alleviating cost pressures.

Risk Factors and Policy Delays

Westpac acknowledges risks, where a sharp labor market downturn could bring rate cuts earlier, while future inflation surprises might prompt RBA tightening. However, they stress that any tightening would be temporary, leading to policy reversals in 2027 as growth and employment slow under restrictive monetary conditions.

Conclusion

Westpac's core message emphasizes the importance of policy delays. Much of the disinflationary impact from past tightening has yet to materialize, signifying that inflationary pressures will continue to diminish through 2026, keeping RBA in wait-and-see mode without pricing in renewed hikes.