Westpac backs an August rate rise call as deeper downturn yet to materialise
Westpac has reaffirmed its call for a Reserve Bank cash rate rise in August, and potentially September, after new modelling showed the economy is holding up despite months of tightening.
Senior economist Pat Bustamante said the latest Westpac-Now nowcast supports the bank's existing rate view, given the absence of a deeper or more protracted downturn.
He said this leaves the Reserve Bank free to concentrate on inflation risk rather than downside risk to activity, a stance consistent with Westpac's forecast for hikes in August and potentially September 2026.
Bustamante said the economy "is weathering the combined impact of external shocks and monetary policy tightening relatively well," with few signs of a sharper downturn taking hold.
The August-September call is not new. Westpac first pushed its projected hikes back from June and August to August and September in May, with the economics team citing the Middle East conflict as a reason for caution.
At the time, Canstar data insights director Sally Tindall noted that around 13% of big four bank customers were carrying no repayment buffer at all, leaving little room to absorb a further increase.
The growth numbers behind the call
Westpac-Now's second estimate puts June quarter GDP growth at 0.2%, with a 70% confidence interval running from -0.19% to 0.39%. That compares with a 0.3% outcome for the March quarter and a 0.9% pace recorded in the December quarter of 2025.
The second estimate is largely unchanged from the first, which was published on 26 June. Westpac's central case has growth picking up to around 0.6% per quarter in both Q3 and Q4 2026, though the bank noted these later projections rely on modelled rather than realised data.
Westpac has since held this line through a third consecutive update. Ahead of the RBA's mid-June meeting, economists Luci Ellis and Neha Sharma repeated the call for a hold that month followed by increases in August and September, describing the approach as consistent with the central bank's priority of bringing inflation down.
They also flagged that "zero or one hike from here is much more likely than three hikes," given the weaker outlook for households.
Westpac remains alone among the big four on this call. CBA, NAB and ANZ have all held to the view that the cash rate has already peaked at 4.35%, with each expecting the RBA to begin cutting rates in 2027 rather than raising them further this year. Tindall has pointed to the resulting divergence as a genuine complication for borrowers weighing whether to fix, noting that the disconnect between the majors "highlights just how uncertain the outlook remains."
Contraction odds tick higher, but only for one quarter
The probability of a negative quarter in Q2 2026 sits at around 30%, up from 27% under the first estimate. For Q3 2026, Westpac put the probability of contraction at roughly 10%, unchanged from the earlier reading.
Simulations run by Westpac put the chance of two consecutive negative quarters over the remainder of 2026 at between 5% and 7%. The bank flagged the Middle East conflict as a source of added uncertainty around its forward estimates.
The path to this point began earlier in the year, when NAB and Westpac brought forward their hike calls to March and May. Brokers modelling repayment sensitivity at the time worked from an estimate of about $91 a month in added repayments on a $600,000 loan for each 0.25-point rise, with a three-rise scenario adding roughly $272 a month in total.
Borrowers already feeling the pinch
Roy Morgan data released a month ago put 29% of owner-occupied mortgage holders, or 1.538 million people, at risk of mortgage stress in the three months to May, the fourth consecutive monthly rise. The firm had modelled that a hypothetical August increase to 4.6% would lift the at-risk share further, to around 30.2%.
That projection has since firmed into a confirmed trend. Roy Morgan's latest figures show 30.3% of owner-occupied mortgage holders, equivalent to 1.6 million people, were classified as at risk in the three months to June, the highest level in two years.
The firm's modelling suggests a rise to 4.6% in August would push the at-risk share to 31.2% (1.65 million), with a further move to 4.85% in September lifting it to 31.4% (1.67 million), a level not recorded since December 2008.
The lending settings governing how much stress new borrowers can be assessed against have not moved in step with this deterioration. APRA confirmed in late May that it would leave the mortgage serviceability buffer at three percentage points, alongside unchanged settings on the countercyclical capital buffer and high debt-to-income lending limits.
The regulator said strong financial buffers leave most households well placed to manage current pressures, though the decision means any further Westpac-anticipated rate rise would be tested against an already-fixed serviceability margin rather than one recalibrated to the current stress environment.
Inside the model driving the call
Westpac-Now draws on more than 60 high-frequency economic and financial variables and is described by the bank as the first Australian model to incorporate internal banking data.
It combines the Westpac Monthly Activity Index with econometric techniques, using a MIDAS framework to convert monthly indicators into a quarterly GDP estimate.
The Monthly Activity Index fell sharply from November 2025 through to April 2026 but has since levelled out, with only a modest decline recorded in May and a flat reading in June.
Labour market, business conditions, household spending and external sector indicators remain soft, though Westpac said the pace of deterioration has eased across these categories.
Westpac's next nowcast release will draw on the July Labour Force Survey and is scheduled for 21 August 2026, described by the bank as a near complete read on Q2 activity.
The release falls ahead of the Reserve Bank's scheduled August meeting, where Westpac expects the next cash rate decision to land, and where the gap between Westpac's forecast and the rest of the big four will finally be tested against the RBA's own decision.
