RBA to hold in July, begin cautious easing from Aug, says Westpac

Westpac anticipates the Reserve Bank of Australia (RBA) will begin a gradual easing cycle in August, with 25 basis point rate cuts expected in August and November, followed by two more in early 2026, ultimately bringing the cash rate down to 2.85% from its current 3.85%. While the RBA prefers a cautious approach, supported by weak GDP and slowing population growth, near-term labor market strength and potentially higher Q2 CPI could delay action; Westpac also suggests downside risks remain, potentially leading to a sharper disinflation than the RBA anticipates.

Analysis

Westpac forecasts the Reserve Bank of Australia (RBA) will initiate a monetary easing cycle commencing in August, with an anticipated 25 basis point rate cut then and another in November. This would be followed by two further cuts in early 2026, ultimately projecting the cash rate to reach 2.85% from its current 3.85%, down from a peak of 4.35%. According to Westpac Chief Economist Luci Ellis, the RBA is expected to adopt a gradual and cautious approach, aiming to reduce policy restrictiveness rather than aggressively moving towards a neutral stance. This view is supported by indicators such as weak GDP and slowing population growth. However, potential delays to the easing cycle could arise from persistent near-term labour market strength or a higher-than-expected Q2 CPI reading. A key factor underpinning the forecast for continued easing is the projection that trimmed mean inflation could fall below the RBA’s 2–3% target midpoint later this year. Westpac also highlights that risks are tilted to the downside, citing a weakening transition of demand from the public to the private sector and slowing wage growth despite low unemployment. This could precipitate what Ellis termed an "oh crikey!" moment for the RBA late in the year if softening consumer spending and business activity lead to deeper disinflationary pressures than currently anticipated.

Key Decisions for Investors

• Investors should closely monitor upcoming Australian economic releases, particularly Q2 CPI, GDP figures, and labour market statistics, as these will be pivotal in shaping the RBA's near-term policy decisions.
• Consider strategies that could benefit from a declining interest rate environment in Australia, such as re-evaluating exposure to fixed income and interest-rate sensitive equities, while exercising caution due to the projected gradual pace of cuts and underlying economic fragilities.
• Maintain vigilance regarding the downside economic risks highlighted by Westpac, including potential further softening in consumer and business activity, which could necessitate adjustments to portfolio risk allocations if disinflationary pressures intensify more rapidly than expected.