RBA Holds Rate Steady Through 2026 as Westpac Signals Rate Cut Delay Until 2027

Westpac’s latest economic assessment has reshaped market expectations around Australian monetary policy. The banking institution now projects that the Reserve Bank of Australia will maintain its current interest rate stance throughout 2026, with relief for borrowers unlikely to materialize until early-to-mid 2027.

The shift in outlook stems primarily from persistent inflationary pressures that continue to exceed the central bank’s comfort zone. Core inflation has surged back above the RBA’s 2-3% target band, particularly during the latter half of 2026, compelling Governor Michele Bullock and her policy committee to adopt a more cautious stance. Despite expectations that price growth will eventually moderate, Westpac’s economists believe the timing of this normalization will extend deeper into 2027 than previously anticipated.

What’s Keeping Rates Elevated

The central bank faces a delicate balancing act—curbing inflation without derailing labor market momentum. Recent labor market tightening adds another layer of complexity to this equation. Should employment conditions remain robust, the RBA may find itself locked into a prolonged holding pattern, potentially delaying any policy accommodation well beyond current estimates.

Westpac Chief Economist Luci Ellis emphasized that sustained inflationary signals through December or into early 2026 could further entrench the hawkish stance. However, Ellis also noted that if inflation readings align with the bank’s forecasts, dramatic policy reversals appear unlikely in the near term.

The Economic Implications

The RBA’s hesitation to cut rates reflects genuine concern about second-round inflation effects. Premature rate reductions could undermine the bank’s credibility and reignite price pressures. Conversely, excessively tight monetary conditions risk dampening economic activity and employment growth—a scenario the bank seeks to avoid.

When cuts finally arrive in 2027, Westpac anticipates an initial cumulative reduction of approximately 75 basis points, signaling a gradual normalization rather than an aggressive easing cycle. The sequencing suggests the RBA will prioritize data dependency, moving cautiously as inflation metrics improve and economic slack emerges.

For now, the interest rate cut cycle remains on hold, leaving Australian borrowers facing an extended period of elevated financing costs as the Reserve Bank of Australia prioritizes price stability above short-term growth considerations.