RBA interest rates: Westpac tips cash rate on hold through 2026

Westpac has ditched hopes for two interest rate cuts in 2026 with a fresh forecast expecting the Reserve Bank to remain on hold through the new year.

But it wasn’t all bad news from the big four bank on Wednesday.

Just one day after fellow giants Commonwealth Bank and NAB revealed shock calls for a February rate hike, Westpac chief economist Luci Ellis declared the talk “premature”.

“Inflation is expected to moderate in 2026, but not soon enough to induce the RBA to step back from its current hawkish view of the risks,” she said.

“If our broader set of forecasts are borne out, rate cuts are still feasible in February and May 2027.”

RBA boss Michele Bullock was talking tough on prices after the central bank’s December meeting in a bid to rein in demand and keep inflation under control.

Core inflation — the RBA’s preferred measure as it strips out volatility — was 3.3 per cent in the 12 months to October, above target.

Ms Bullock warned the Reserve would be willing to lift the cash rate from 3.6 per cent if inflation increased further.

Yet Westpac’s Ms Ellis, once a senior official at the RBA, played down the hotter recent consumer price rises as “noise”.

“We expect inflation to get back to the RBA’s target . . . but not until later in 2026,” she said.

“If our inflation and labour market view is right, by the end of 2026 it will become apparent that domestic inflation pressures have eased.”

She said a weaker jobs market would force an earlier move.

Economists have debated whether the recent inflation surge reflected temporary factors or items outside the RBA’s influence, including so-called administrative prices set by government.

But the RBA is concerned the trend is broader.

The key cause of inflation is the strength of demand against the economy’s supply capacity, with interest rates and money supply decisions by the Reserve crucial drivers.

There can be wide divergence across categories, with services such as education and health both rising at a fast pace of at least 4 per cent annually.

Yet higher administrative prices also soak up household cash and limit the capacity for inflation in other sectors of the economy — meaning increased school and hospital costs do not fully push overall inflation higher.