Westpac has brought forward the date it expects the Reserve Bank to start cutting interest rates by roughly a year, to August 2027. Before that happens, on the bank's own numbers, the average borrower pays about $229 a month more than they do today.
That is the part of the forecast that matters to households, and it is the part that got the least attention when the note landed on Friday. Luci Ellis, chief economist at Westpac Group, still expects two more increases of 25 basis points each, in August and September, taking the cash rate from 4.35 per cent to 4.85 per cent. The cuts follow, at 25 basis points a quarter, starting in August 2027 rather than early 2028.
“RBA remains hawkish and our conviction regarding a rate hike in August has increased," Ellis wrote. On the cuts, she said Westpac now expects them "to come sooner than previously forecast, starting August 2027 rather than early 2028 as previously", at "a relatively tentative pace of rate cuts of 25bps per quarter".”
Work the arithmetic and the shape of the next two years becomes clear. The average new owner-occupier loan was $735,000 in the March quarter, according to ABS lending data. The average variable rate on new owner-occupier loans was 6.23 per cent in May, according to RBA table F6, published on Tuesday. On a 25 year loan, two hikes passed through in full take the monthly repayment from about $4,839 to about $5,069. The first cut, whenever it lands, gives back about $113 a month.
The Reserve Bank is not forecasting cuts at all. Its cash rate target has been 4.35 per cent since 5 May, when the board raised it for the third time this year, and the board left it there unanimously on 16 June. Its statement said headline and underlying inflation "are still too high", and that the board would do what was necessary "including increasing the cash rate target further if required". The bank's own May outlook assumed a cash rate rising to 4.70 per cent by the end of 2026.
The number driving that is the trimmed mean, the RBA's preferred measure of underlying inflation, and it is going the wrong way. The ABS put it at 3.3 per cent over the year to March, 3.4 per cent to April and 3.6 per cent to May. Headline inflation was 4.0 per cent over the year to May. Unemployment was 4.4 per cent, down a tenth of a point. Wages grew 3.3 per cent over the year to March, below every one of those inflation readings.
Westpac is the outlier among the major banks in still forecasting increases. NAB dropped its own August hike call last month. "The next move in the cash rate is likely to be down, but the timing is uncertain," its chief economist, Sally Auld, said on 9 June. Every one of these numbers is a forecast by a commercial bank, not a decision by the Reserve Bank, and the two do not have the same standing.
One input to the August decision is already locked in, and the government set it. Fuel excise relief, cut during the Middle East war, was partially wound back on 1 July, adding 16 cents a litre. ACCC figures published on Friday show average petrol across the five largest cities went from 151.5 cents a litre on 30 June to 167.5 cents on 8 July, a rise that matches the excise step almost exactly. Perth wore 24.5 cents of it. The rest of the relief ends on 3 August, adding roughly another 16 cents, one week before the RBA board meets on 10 and 11 August.
That means a government-imposed price increase lands inside the inflation figure the Reserve Bank will be looking at when it decides whether to raise the price of money as well. Brent crude, by contrast, averaged US$70 a barrel in the week to 8 July and the ACCC called it relatively stable. The pump price is not moving because of the oil.
Two data releases stand between here and the decision. June labour force figures come on 23 July. June inflation, including the quarterly detail, comes on 29 July. Westpac's August call rests on both.
