Westpac Economics has pushed back against growing market talk of renewed tightening, arguing the Reserve Bank of Australia is more likely to remain on hold throughout 2026, even as inflation returns to target later next year. In contrast to calls from Citi and NAB for two rate hikes in 2026, and CBA’s forecast for a February hike, Westpac sees the bar for further tightening as high and the next material policy move still pointing toward eventual easing in 2027.
While the RBA has adopted a more hawkish tone following recent upside inflation surprises, Westpac argues much of that strength reflects administered prices and temporary noise rather than renewed domestic demand or labour-market pressure. Inflation is expected to fall back below the midpoint of the 2–3% target band on a trimmed mean basis, but not until later in 2026 — too late, in Westpac’s view, to justify rate cuts next year.
Crucially, the bank highlights an economy that is evolving broadly as expected. Public-sector demand is slowing after a strong run, private-sector activity is gradually recovering, and the labour market is easing rather than re-tightening. Productivity growth is also running stronger than the RBA’s conservative assumptions, helping to ease underlying cost pressures.
Westpac acknowledges risks on both sides. A sharp deterioration in the labour market could bring rate cuts back onto the agenda earlier, while further near-term inflation surprises could still spook the RBA into a hike. However, it stresses that tightening would likely prove temporary, forcing a policy reversal in 2027 as growth and employment soften under the weight of still-restrictive monetary settings.
The bank’s core message is that policy lags matter. Much of the disinflationary impulse from past tightening has yet to fully flow through, suggesting inflation pressures will continue to fade through 2026 — leaving the RBA in wait-and-see mode rather than joining markets in pricing renewed hikes.
