Westpac Economics revised its outlook for the Reserve Bank of Australia's cash rate to an extended hold for the whole of 2026, noting that while inflation is expected to moderate during the reported year, it will not be soon enough to induce the central bank to step back from its current hawkish view of the risks, according to a Wednesday report.
The central bank recognized that some of the recent inflation surprises in the September quarter and October reflected temporary factors, but has since communicated that it is more worried about upside risks to inflation.
Inflation is expected to get back to the Reserve Bank's target, and below the midpoint of the 2% to 3% range on a trimmed mean basis, but not until later in 2026. This could clear the way for rate cuts in the first half of 2027, in February and May.
At current levels of the cash rate and other interest rates, monetary policy remains mildly restrictive, and noting the usual lags, this will continue to be evident in the data throughout 2026, the bank said. Public sector demand growth is slowing, private sector demand growth is recovering, and the labor market is gradually easing. Underlying growth in labor costs is also easing.
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