Australia still expected to begin cutting rates soon
While the world’s advanced economies initially followed similar strategies to combat inflation, recent developments are leading to divergence in monetary policy approaches, a new Westpac report has noted.
According to Luci Ellis (pictured above), chief economist at Westpac Group, the global interest rate landscape is evolving as central banks respond to differing economic pressures.
Ellis pointed out that during the past few years, central banks in developed nations pursued restrictive policies to control inflation, maintaining high interest rates until inflation showed clear signs of returning to target. However, as monetary policy operates with a lag, policy rates needed to start declining ahead of inflation actually reaching the target.
Now, differences are emerging, Ellis stated in Westpac’s latest monthly report on Australia and the global economy. While some economies continue to face inflationary pressures, she said others are experiencing weaker growth and rising unemployment.
The US outlook has changed significantly due to planned tariff increases under the Trump administration, which are expected to create a more inflationary environment. Ellis highlighted that the Federal Reserve’s concerns about the labour market, which were prominent in mid-2024, have now diminished. As a result, she no longer expects the Fed to move toward a neutral policy stance.
“We still expect some further cuts and a similar end-2026 point as before,” Ellis said, but noted that “the cuts that do come are now notably delayed relative to our pre-inauguration view.” This shift has also driven up bond yields, with US 10-year Treasury yields likely to test the 5% mark at times over the next year.
Unlike the US, Australia and the UK are positioned somewhere between economies still battling inflation and those already cutting rates aggressively.
Ellis pointed out that Australia is not a primary target of the Trump administration’s tariff policies, so its impact will come indirectly through global economic shifts, particularly China’s response. She expects that Chinese authorities will implement domestic stimulus measures to counteract the negative effects of US tariffs, which could limit the broader economic impact on Australia. While a weaker Australian dollar could raise the cost of US imports, Ellis does not foresee this significantly delaying monetary policy easing.
“We therefore continue to expect the RBA to embark on the rate-cutting phase shortly,” she said. Strong inflation data for the December quarter, and likely the March quarter as well, support a potential rate cut beginning as early as February.
Other advanced economies, including Canada, New Zealand, and the Euro area, are experiencing weaker growth and, in some cases, rising unemployment. Ellis predicts that central banks in these regions will continue cutting rates to stimulate their economies.
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