VIDEO: A June rate hike is now less likely, says Westpac Chief Economist

The RBA has delivered its third consecutive rate rise in 2026, but Governor Michele Bullock said the central bank now has time to assess how the Middle East war shock affects the economy. Westpac Chief Economist Luci Ellis said the bank’s expected June rate hike is now less likely. The update points to a pause in the tightening path, with policy now more data-dependent and geopolitics adding uncertainty.

Analysis

The key market implication is not the hike itself but the shift from a tightening path to a data-dependent pause, which should flatten the front end of the rates curve and reduce volatility in rate-sensitive sectors. If the central bank is now willing to look through the first-round energy shock, the market will likely price a lower terminal rate probability and a slower pass-through into mortgage and business lending costs. That matters most for banks and domestically levered sectors: less near-term margin expansion for lenders, but also a lower risk of credit deterioration if households absorb higher fuel and utility bills without a second tightening leg.

The second-order effect is that geopolitics may tighten financial conditions even without the policy rate moving. Higher imported energy is effectively a tax on consumption, so the near-term beneficiary set is narrow and defensive, while retailers, discretionary, housing, and transport-linked names face a delayed demand hit over the next 1-3 months. This is especially relevant if the shock lifts inflation expectations but weakens growth: a stagflation-lite setup usually favors duration-sensitive assets with pricing power over cyclicals with thin margins.

The contrarian risk is that the market may be too quick to price a dovish pivot. If the war shock is contained and domestic data remain sticky, the central bank still has room to re-tighten later, meaning the current repricing could reverse sharply once the growth hit proves smaller than feared. In that case, front-end yields could back up 20-40bps as investors unwind the pause narrative, and the best risk/reward may be in fading aggressive duration longs rather than chasing an outright macro call.

Key Decisions for Investors

• Add a tactical long in AU2-year bond futures / receive-front-end rates for 2-6 weeks; target a 15-25bp rally in 2Y yields if the pause narrative holds, with a tight stop if inflation-sensitive data surprise hotter.
• Reduce exposure to Australian domestic banks on rallies and favor a relative short vs. defensive insurers: lower rate-hike odds compress near-term NIM expansion for banks while insurers are less exposed to mortgage repricing.
• Pair trade: short Australian consumer discretionary / long Australian staples or utilities for 1-3 months; the energy shock is a tax on households and should show up first in discretionary spend and later in margins.
• Buy optionality on AUD downside versus USD for 1-2 months; a war-driven risk-off move plus a softer RBA path can create a clean asymmetry, with downside accelerating if global energy prices spike again.