Westpac’s chief economist, Luci Ellis, has confirmed the major bank retains its current expectation for the near-term path for the Reserve Bank of Australia (RBA) cash rate – a 0.25 bps cut in August and November – and another two over 2026 to bring the cash rate down to 2.85 per cent.
The forecast has the 2026 rate cuts priced in for the February and May meetings next year; however, Ellis noted that these cuts could potentially come earlier, in either December and February or February and March.
This would occur “if inflation and the labour market turn out weaker late in 2025 than we expect”, Ellis said.
The chief economist noted the RBA’s reluctance to move the cash rate earlier this year; however, this rhetoric has since changed as the central bank has seemingly gained confidence in the disinflation process and has become “comfortable with the market pricing for the cash rate”.
“Let’s not get ahead of ourselves, though,” Ellis said, “the board described itself as having a preference to move cautiously and predictably”, and explained that this is code for not wanting to do back-to-back cuts.
“It also made it clear in the minutes that this was about reducing restrictiveness, not moving quickly back to neutral in the style of the Federal Reserve last year.
“And the board is not in the habit of changing policy just because the market is pricing it in,” Ellis added.
Despite the recent “disappointing” gross domestic product print (0.2 per cent q/q, 1.3 per cent y/y), there’s nothing that has happened since the RBA’s last statement to convince the board to change its mind in the near term, according to Ellis, nor is the upcoming flow of data (labour force, May CPI) likely to move the needle.
“Given this, the overall data flow will be enough to convince the board that further reduction in policy restrictiveness is warranted,” Ellis said.
“It will not, however, be enough to induce it to rush that withdrawal of restrictiveness.”
Given the outlook, she highlighted, arguments for a 50 bps (two cuts) reduction are gaining ground, particularly when considering the outlook for inflation is “shifting in the face of slowing population growth and a handover from public to private sector demand growth that is looking shakier”.
In fact, Ellis noted that population growth is slowing faster than previously expected, which is likely to ease housing pressures – particularly on rents – and contribute to softer underlying inflation.
Alongside some moderation in services inflation, these factors are expected to push trimmed mean inflation below the Reserve Bank’s 2.5 per cent midpoint target around the end of the year.
“Indeed, if we are right, the RBA might be in for a bit of an ‘oh crikey!’ moment late this year,” Ellis added.
“A ‘shaky handover’ from the post-expansion normalisation in the care economy and the completion of a raft of state government infrastructure projects could weigh on both output and employment.”
Drawing parallels with the late 2010s – weak consumer spending starting to weigh on business activity, in particular – Ellis stated the result is likely to be “soggy growth” and unexpectedly weak wage growth despite Australia’s high employment rate.
“In that case, what at first looked like an inflation trajectory solidly anchored at or above the 2.5 per cent midpoint of the target range will instead look more like our forecasts, drifting below 2.5 per cent for a time.”
