Rate Hold Strategy: Why Australia Won't Cut Rates Until 2027

Westpac’s Latest Forecast Signals Extended Policy Pause

Westpac economists have recalibrated their outlook, projecting that Australia’s central bank will keep rates on hold throughout 2026, with the first potential cuts arriving in early-to-mid 2027. This marks a significant shift from previous expectations and underscores mounting concerns about persistent price pressures in the Australian economy.

The Inflation Puzzle Keeping Rates Elevated

The core driver behind this extended rate-hold scenario is the resurgence of inflation, particularly core inflation readings that have climbed above the Reserve Bank of Australia’s comfort zone of 2% to 3% during the latter half of 2026. Although headline inflation is anticipated to moderate eventually, the stubborn nature of underlying price pressures is compelling the RBA to maintain its cautious stance.

Governor Michele Bullock’s recent comments at the policy meeting reinforced this defensive posture, with concerns about inflation remaining the central focus of monetary decision-making. Rather than easing financial conditions, the bank’s priority remains vigilant inflation management, even at the potential cost of near-term growth accommodation.

What Changed for Australia Rate Policy

Previously, markets had priced in modest rate relief beginning in 2026. However, the persistence of inflationary headwinds—combined with a tightening labor market that could reignite wage pressures—has prompted a reassessment. The RBA’s framework now effectively locks in rates, maintaining them at current levels to anchor inflation expectations.

When Relief Finally Arrives

Westpac’s baseline scenario envisions roughly 75 basis points of cumulative rate reductions beginning in 2027, assuming inflation trajectories align with the bank’s forecasts. However, this optimistic timeline hinges on price pressures genuinely retreating toward target ranges by year-end 2026.

Chief Economist Luci Ellis cautioned that any significant inflation surprises—particularly lingering price growth persisting into early 2026—could further delay policy accommodation. Conversely, Ellis noted that premature rate hikes would likely prove counterproductive, ultimately necessitating reversals once inflation moderates and growth concerns resurface.

The Balancing Act Ahead

The RBA’s navigation of inflation control versus labor market health remains precarious. A sustained tight labor market could reignite wage-price spirals, cementing the case for extended rate holds. Conversely, if disinflationary forces accelerate unexpectedly, the central bank may need to recalibrate sooner than currently anticipated—though such scenario adjustments remain unlikely under base-case assumptions.

For market participants, the message is clear: Australia rate policy faces an extended holding pattern, with material shifts deferred to 2027 at the earliest.