All of Australia’s largest home loan lenders anticipate Aussie households are now in line for interest rate relief from next year.
It comes as Westpac – typically the most hawkish of the big four banks – updated its expectations around the Reserve Bank’s interest rate path today, confirming it now expects rate relief next August rather than in 2028.
The change comes after the bank updated its inflation outlook on the back of ongoing conflict in the Middle East, noting some improvement in the energy market outlook.
It comes after a challenging few months for households juggling high fuel and food prices as the global oil crisis wreaks havoc on supply changes internationally.
Westpac used its July Market Outlook to confirm it is “less hawkish than before” when it comes to interest rates however, noting both inflation and labour market data are tracking to its expectations.
“Despite the recent flare-up in hostilities in the Middle East, the inflation outlook in 2027 looks a bit more benign than a couple of months ago,” the outlook read. “We have therefore brought forward the expected future cuts.”
Oil tankers and gas tankers remain in limbo in the Strait of Hormuz. Picture: Getty
The change brings the bank into line with ANZ, National Australia Bank and Commonwealth forecasts for easing from mid-2027. If Aussies are stuck holding out until next August, the rate cut will be the first for two years.
While Westpac’s longer-term outlook on inflation is more positive, chief economist Luci Ellis warns the RBA might need to front-load tightening in the meantime.
Westpac is the outlier of the big four heading into the Reserve Bank monetary policy board’s (MPB) next meeting, forecasting a rate hike for 11 August. Ms Ellis says will likely be one of two more before the year is out.
Westpac chief economist Luci Ellis says the RBA may "front load" tightening. Picutre: Supplied
“The MPB continues to believe the economy is too tight and requires a period of below-average growth to get inflation under control,” she said.
The RBA will also be “once bitten, twice shy” from its experience last year of trying to gradually bring inflation under control, Ms Ellis added.
“Inflation popped back up again almost immediately after it started cutting rates,” she warned. “It will not be pre-emptive in its rate cuts.”
Despite this, Westpac says lower inflation in 2027 will be hard for the bank to ignore, with households keen to get back on a path to relief as higher mortgage costs weigh heavy on many.
The year’s three rate hikes have added approximately $240 a month in minimum repayments on a $500,000 home loan, Mortgage Choice calculations show.
Inflation a mixed picture
The most recent headline inflation data gave borrowers a glimmer of hope the RBA could be done hiking rates for now, though underlying inflation statistics paint a different picture.
The measure of underlying inflation, called the trimmed mean, crept up to a near two-year high in May after a period of impressive stability since February. It’s that jump that has solidified Westpac’s hawkish view for the rest of the year.
| Month | Trimmed mean (%) |
| May | 3.6 |
| April | 3.4 |
| March | 3.3 |
| February | 3.3 |
| January | 3.3 |
“Our conviction around our expectation of an August hike has risen,” Ms Ellis said.
A hike in August would mark the fourth for the year, but comes after the RBA’s decision to hold steady in June while it waited to see how earlier hikes were flowing through to the economy.
In its statement accompanying the hold decision, the MPB confirmed it was keeping options open but was clear it is willing to lift rates if needed.
“This drafting decision is unusual for an RBA statement,” Ms Ellis said. “It was a stronger steer than previously [and] suggests the MPB wanted to hose down recent speculation that they are done hiking rates.”
The RBA is poised to hike interest rates if it feels it is necessary. Picture: Hu Jingchen/Xinhua)
Speeches by senior RBA officials over the last week have also erred on the side of caution, specifically noting the need to front-load its decisions in response to inflation risks.
Speaking in Canberra last week, assistant governor Sarah Hunter said households may have to ride out both rising unemployment and further rate hikes while tensions remain high in the Middle East.
“As a small open economy, we are buffeted by changes in the global environment,” she said. “The board will continue to act as needed.”
The next RBA decision on interest rates will be 11 August.
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