The Reserve Bank of Australia maintained the cash rate at 3.6 percent through late 2025 decisions, reflecting caution after inflation surprises. Westpac’s latest analysis confirms an extended hold at this level for all of 2026, marking a shift from earlier expectations of cuts. This stance prioritizes anchoring inflation expectations within the 2 to 3 percent target band before easing further.
Chief economist Luci Ellis highlights that recent inflation upticks, driven partly by temporary administered prices, have reinforced the RBA’s hawkish tilt. Monetary policy lags from prior tightening continue to exert downward pressure on demand, supporting the hold strategy. Borrowers can anticipate no immediate relief or hikes in the base case, fostering predictability in mortgage repayments.
Why Westpac Forecasts Stability
Westpac bases its prediction on a balanced view of domestic demand recovery and fading policy offsets. Private sector activity picks up as public spending normalizes, averting a shaky handover risk. Productivity gains exceed RBA assumptions, aiding cost control without aggressive intervention.
Inflation moderation appears on track but delayed, arriving later in 2026—too late to prompt mid-year cuts. Labour costs ease gradually, aligning with target returns by year-end on a trimmed mean basis. This timeline convinces Westpac that the RBA will resist market pressures for premature moves.
| Economic Indicator | 2025 Average | 2026 Forecast (Westpac View) |
|---|---|---|
| Cash Rate | 3.85% (declining to 3.6%) | 3.6% (steady) |
| Headline Inflation | 3.3% | Eases to 2.6-3.0% by late year |
| Unemployment Rate | 4.2% | Around 4.3-4.4% |
| GDP Growth | 1.8-2.0% | 2.2-2.4% |
Inflation Trends Driving the Hold
Inflation rose to 3.8 percent in late 2025, with core measures above target through mid-year. Westpac expects headline CPI to peak near 3.7 percent early in 2026 before declining, influenced by subsidy roll-offs and global factors. Trimmed mean inflation holds at 3.2 percent initially, dipping below the midpoint later.
Temporary shocks like electricity rebates ending contributed to surprises, but domestic pressures remain contained. RBA communications emphasize upside risks, delaying easing despite policy restrictiveness. Westpac models show policy effects peaking in 2026, ensuring gradual disinflation without hikes.
Global influences, including US tariff impacts, add volatility but do not derail the path. Treasury projections align, forecasting 3 percent by mid-2026. This persistence justifies the steady rate to avoid re-ignition.
Labour Market Balancing Act
Unemployment stabilized at 4.3 percent in late 2025, with forecasts trending to 4.4 percent through 2026. Participation rates hover near 67 percent, supporting resilient employment despite full-time softening. Underemployment edges up, signaling mild loosening.
Westpac warns that sharper weakening could revive cut discussions, as the RBA balances inflation control with jobs growth. Wage pressures moderate to 3 percent annually, bolstered by productivity upticks. This equilibrium underpins the hold, preventing overheating or collapse.
Hours worked decline slightly, reflecting lagged tightening, yet total jobs hold firm. RBA targets full employment alongside price stability, making labour data pivotal.
GDP Growth and Broader Economy
Australia’s GDP expands at 2.2 to 2.4 percent in 2026, accelerating from 1.8 percent prior. Private demand recovery, real wage gains, and fiscal support drive this, per OECD and Deloitte views echoed by Westpac. Productivity and participation rises lift potential growth above RBA estimates.
Commodity prices stabilize, while trade partners slow mildly. Infrastructure spending tapers, handing off to consumption-led momentum. This above-potential pace pressures inflation mildly but stays manageable.
| Growth Drivers | Positive Factors | Headwinds |
|---|---|---|
| Consumption | Tax cuts, wage growth | Caution from high rates |
| Investment | Rate stability, business confidence | Global uncertainty |
| Exports | Resource demand | Tariffs, softer partners |
| Public Demand | Infrastructure tailwinds | Normalization |
Risks on Both Sides
Upside inflation surprises in early quarters could prompt hikes, though Westpac deems this unlikely without growth downgrades. Labour unraveling—unemployment spiking above 4.5 percent—might accelerate cuts. Global shocks like escalated tariffs or market turmoil add variance.
Base case risks tilt neutral, with policy lags dominating. Markets overreacted to hikes post-data, but fundamentals support hold. Westpac reserves flexibility for revisions.
Impacts on Households and Businesses
Mortgage holders enjoy repayment stability, with variable rates around 5.5-6 percent. Fixed-rate options lock in predictability amid uncertainty. Savers see term deposit yields near 4 percent, rewarding caution.
Businesses plan with confidence, as borrowing costs steady. Property markets cool mildly, with prices rising 3-5 percent nationally. Superannuation funds benefit from balanced portfolios in a stable rate environment.
Refinancing surges if competition heats, potentially shaving margins. First-home buyers monitor for any softening.
Big Four Banks Comparison
Westpac joins ANZ in steady forecasts, contrasting CBA’s potential hike and NAB’s mixed signals.
| Bank | 2026 Cash Rate Path |
|---|---|
| Westpac | Hold at 3.6% all year |
| ANZ | Steady |
| CBA | Possible +0.25% in Feb |
| NAB | +0.25% Feb/May possible |
Divergence stems from inflation timing views.
Looking Beyond 2026
Cuts emerge in early 2027—February and May—if forecasts hold, reaching neutral levels. This normalizes policy as inflation embeds below midpoint. Long-term growth sustains at 2.5 percent potential.
Policymakers eye productivity for enduring stability. Households prepare for gradual easing post-hold.
Lance Evans is a contributor at CSKHYBER.co.nz covering New Zealand and Australia news, with a focus on trending updates and public-interest stories.