Westpac still expects the Reserve Bank to deliver two more cash rate increases but now sees them coming in August and September rather than June and August.
The change follows this week’s Monetary Policy Board meeting and Governor Michele Bullock’s press conference, where the latest three rate hikes were framed as addressing pre‑existing inflation pressures and creating “space” to assess fallout from the Middle East conflict.
Westpac chief economist Luci Ellis (pictured) interprets that tone, alongside a dissenting vote on the board, as meaning another back‑to‑back move in June is no longer the base case. It remains possible but is now seen as less likely.
Even if the RBA does pause in June, the underlying inflation outlook still points to higher mortgage rates.
Westpac’s updated May Market Outlook, incorporating a revised assumption for when the Strait of Hormuz reopens, points to slightly higher inflation than previously expected, and higher than RBA’s own profile through the second half of 2026. The bank expects trimmed mean inflation to run above the central bank’s projections, particularly as businesses pass on non‑labour cost increases.
RBA itself has noted that “higher fuel prices are likely to have second-round effects on prices for goods and services more broadly”.
Ellis argues those effects will be stronger than RBA currently assumes, especially in home‑building costs, which feeds directly into new housing supply and construction finance pipelines. She also cautions that oil and fuel price assumptions used in Westpac’s forecasts sit above the futures‑based path in RBA’s numbers, adding further upside risk to borrowing costs.
That assessment is reinforced by RBA’s latest decision and guidance. The MPB this week delivered its third consecutive 25‑basis‑point hike, taking the cash rate back to its previous peak of 4.35% in an 8–1 decision, and warned that inflation is likely “to remain above target for some time”. Rate hikes already appear to be biting, with national dwelling price growth slowing from 0.6% in January to 0.2% in April, and prices falling in Sydney and Melbourne but still rising in Brisbane, Adelaide and Perth.
Ellis stresses this is a tactical shift in timing, not a change in the overall outlook. The catalyst for later moves is that upcoming events such as the federal budget and National Wage Case are unlikely to materially alter RBA’s forecasts.
Instead, Westpac expects the June and September quarter CPI data to act as a “wake-up call” on how readily firms are passing higher costs through to prices, and how slowly those increases unwind even if fuel costs ease.
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