Westpac, one of Australia's largest banks, has updated its outlook for the Reserve Bank of Australia (RBA), forecasting that rate cuts will not begin until August 2027. However, the bank also warns that the RBA could still raise rates in August and possibly September if inflation proves stickier than expected.
In a research note, Westpac economists argued that the RBA remains in "inflation-fighting mode." The central bank sees demand running hotter than the economy can comfortably supply, so it wants a period of slower growth to ease price pressures. That is why Westpac's forecast keeps an August hike on the table, with the decision heavily dependent on the June-quarter consumer price index (CPI) release. If that data does not show a significant cooling, a second move in September becomes the most likely follow-up.
Why the RBA Might Still Hike
Westpac pointed to several risks that could keep inflation elevated, including higher oil prices and other supply shocks. These can push prices up even when economic growth is weak, forcing the RBA to choose between accepting slower progress on inflation or keeping policy tighter for longer. The bank also noted that inflation may track closer to the RBA's own forecasts later in the year than it previously expected, which helps explain why it brought forward its first cut call—even if the near-term path could be bumpier.
The RBA's cash rate currently sits at 4.35%, a level that has been unchanged since November 2023. Markets have been pricing in a potential cut later this year, but Westpac's view suggests that the central bank is not yet ready to ease. The bank's economists believe that the RBA will need to see sustained evidence that inflation is returning to its 2-3% target band before it can start cutting.
What It Means for Borrowers and Investors
For households and small businesses, the key part of Westpac's view is the near-term "hike risk." Markets and banks care most about what the RBA might do over the next one or two meetings, because that is what feeds into short-term funding rates—the rates banks pay to borrow for a few months to a couple of years.
If investors think an August (and possibly September) hike is still plausible, those funding costs can stay elevated. That tends to keep pressure on variable mortgage rates and can limit how far lenders are willing to lower new fixed-rate home loans and business loans, even if the first cut is still forecast for later. For everyday investors, this means that borrowing costs are unlikely to ease soon, and any relief from rate cuts remains a distant prospect.
Westpac's forecast also highlights the broader uncertainty in the global interest rate environment. Central banks around the world, including the Federal Reserve and the European Central Bank, are grappling with similar inflation challenges. In Japan, for example, wholesale inflation accelerated in June, raising the prospects of further rate hikes there. Meanwhile, Egypt's central bank held rates steady as inflation signals diverged. These global trends can influence the RBA's thinking, as they affect capital flows and currency values.
Looking Ahead
The RBA's next policy meeting is scheduled for early August, and the June-quarter CPI data, due later this month, will be the key input. If inflation comes in hotter than expected, the case for a hike will strengthen. If it cools, the RBA may hold steady, but Westpac's view suggests that cuts are still a long way off.
For investors, the message is clear: the RBA is not done fighting inflation, and the path to lower rates is likely to be longer and more uncertain than many hoped. The near-term focus should be on the inflation data and the RBA's response, rather than on distant rate cut forecasts.
