Chief economist sharpens her call on the RBA's next move
Westpac now expects the Reserve Bank of Australia (RBA) to start cutting the cash rate in August 2027 – a year earlier than it previously forecast – even as its conviction in an August 2026 hike has grown firmer, according to the bank's latest weekly note.
Westpac's chief economist Luci Ellis said the bank's conviction that the RBA will lift the cash rate in August has increased, with June's inflation and labour market data landing broadly as expected and recent RBA commentary pointing to a preference for larger, more front-loaded hikes.
A follow-up increase in September remains Westpac's base case, but Ellis said the bank's confidence in that second move, and its timing, has softened.
Near-term hawkish
The shift is nuanced rather than a straight reversal. Westpac's updated forecasts still place underlying inflation a touch above the RBA's May Statement on Monetary Policy projections, though by less than before, as softer energy price pass-through works its way through the numbers. That's enough, on Westpac's reading, to bring forward the point at which the Monetary Policy Board starts easing.
The call follows a run of hawkish signalling from the central bank. The RBA held the cash rate at 4.35% at its most recent meeting, while flagging it would do what was necessary to achieve price stability, "including increasing the cash rate target further if required."
Westpac's pivot also reflects a broader softening in the energy-driven inflation story. The bank now sees the earlier surge in fuel and transport costs as a one-off level shift rather than a lasting lift in the inflation trend, tempering its 2027 outlook relative to earlier forecasts.
Long-term less so
“Further out, the outlook is less hawkish than before,” said Ellis. “The recent flare-up in the Middle East still leaves energy prices well below their earlier peaks. The narrative of fuel and other transport costs driving other prices has faded; we have seen few announcements in this vein lately.”
The partial extension of the cut to fuel excise will also smooth the path of these costs and reduce the pulse to inflation from the unwind of this policy measure, noted Ellis.
She continued: “While this episode of pass-through has been unusually strong – as we flagged some months ago – we now have more conviction that it is mostly a one-off level shift and not an ongoing lift in the inflation trend.
“Consequently, the inflation outlook for 2027 is not quite as far above the RBA’s own May forecasts as we previously thought. This brings forward the likely timing of the unwind of current tight monetary policy. However, the (Monetary Policy Board) will be cautious in its approach to easing policy given its experience last year.”
