Inflation pressures in the market sector are expected to ease over the course of 2026, leaving room for cuts from mid-2026, assuming the labor market also eases a bit further, Westpac said in a report on Dec. 12.
If inflation turns out higher than expected, a rate hike in 2026 cannot be ruled out, although a more likely scenario is a prolonged pause.
Australia's economic recovery continued through 2025. broadening to include businesses and the construction sector. Household spending strengthened over as real incomes recovered. Looking ahead, household consumption is expected to maintain its current momentum of around 2.5% annually.
The Reserve Bank of Australia's policy easing cycle was largely par for the course for 2025 as central banks charted a course back to more "normal" policy settings, after having largely overcome the post-pandemic inflation surge. A stronger showing in the third quarter underlying inflation and the debut of the new monthly data release in October which, together with a more pessimistic view on supply capacity, has brought concerns over upside inflation risks to the fore. As temporary factors wash-out, and if our more constructive view on supply capacity proves correct, inflation pressures in the market sector are expected to ease over the course of 2026.
The labor market has eased a little, and there are few signs of inflation coming from the market sector's supply side, with base wages growth moderating as expected and productivity growth already outstripping the central bank's assumptions, the report said.
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