The Reserve Bank of Australia is likely to keep interest rates unchanged in 2026, with rate cuts most likely postponed until 2027.
2025-12-17 18:38:44
Westpac's latest economic assessment indicates that while inflation is expected to return to the Reserve Bank of Australia's (RBA) target range in 2026, the bank's hawkish policy stance is unlikely to change in the short term. Looking ahead to 2026, the RBA is likely to maintain its benchmark interest rate unchanged throughout the year, with the window for rate cuts most likely postponed until early 2027, while the dual risks of rate hikes and cuts continue to oscillate.
The 2026 interest rate cut has completely fallen through.
According to a recent report by Westpac's economic research team, the bank has made a significant revision to its forecast for the Reserve Bank of Australia's (RBA) cash rate path. The report explicitly states that the RBA will maintain its current interest rate level throughout 2026, completely postponing the previously predicted rate cut windows in May and August 2026.
The report states that while the Reserve Bank of Australia (RBA) acknowledges that the recent unexpected rise in inflation data included temporary factors, it is sufficient to raise serious concerns about upside risks to inflation. The pace of inflation decline is a key variable – the RBA predicts that inflation will not return to the target range until the second half of 2026, and the cut-off mean inflation rate will be below the midpoint of the 2%-3% target range. This timeframe is far from sufficient to justify the RBA initiating interest rate cuts in 2026.
The report further provides a clear timeline: if inflation and the labor market move in line with expectations, February and May 2027 will be the best windows for the Reserve Bank of Australia to initiate interest rate cuts and unwind the remaining policy tightening measures.
Interest rate hikes are not impossible; the labor market is a "key variable."
Beyond the baseline forecast of maintaining interest rates unchanged, the market is more concerned about the potential risk of a policy shift. Westpac's analysis indicates that the Reserve Bank of Australia (RBA) will face a dilemma in its policy stance in 2026.
From a downside risk perspective, the performance of the labor market could be a trigger for interest rate cuts. The report states that if the labor market deteriorates significantly, a rate cut in 2026 could be reconsidered. Currently, the Australian labor market is gradually cooling, and the growth rate of labor costs is also slowing. If this trend accelerates, the Reserve Bank of Australia may be forced to adjust its policy stance earlier than expected.
However, upside risks should not be ignored. Following recent unexpectedly high inflation data, the market has begun pricing in interest rate hikes. While Westpac believes a short-term rate hike is not the baseline scenario, it has not completely ruled out the possibility. If inflation rises more than expected again in the remainder of the fourth quarter of 2025 or early 2026, it could disrupt the current policy balance. The report warns that if the Reserve Bank of Australia initiates a short-term rate hike, forecasts for Australian economic growth, medium-term inflation, and the labor market will all need to be revised downwards, and a policy tightening shift is highly likely in 2027.
The private sector takes over growth, and risks dissipate.
From the perspective of Australia's economic fundamentals, the current trend is largely in line with market expectations, which provides support for the Reserve Bank of Australia to maintain policy stability.
Data shows that the growth rate of public sector demand has slowed significantly, and even turned negative in the first half of 2025. In contrast, the growth rate of private sector demand is gradually recovering, and the risk that the market was worried about that "private sector growth will not be able to take over smoothly after the cooling of public sector demand" has gradually dissipated.
Notably, Australia's productivity growth has exceeded the Reserve Bank of Australia's previous pessimistic forecasts, which is seen as a significant positive signal of easing inflationary pressures. Westpac analysts believe that by 2026, the Australian economy will further overcome weak private sector demand and achieve more robust growth.
Policy lag effect becomes key: Downward trend in inflation remains unchanged
Regarding the future trend of inflation, Westpac Bank maintains its core judgment that "the downward trend remains unchanged," and the policy lag effect is an important basis for supporting this judgment.
"Many market commentaries are underestimating the lag in monetary policy," the bank's economic research team pointed out. The transmission of monetary policy to the labor market and inflation typically takes more than a year to show its peak effect. Current economic data mainly reflects the policy impact during the peak of cash interest rates a year ago. Therefore, the labor market is likely to cool further, and inflation will also decline accordingly.
The report explains that the previous expansion of the employment-intensive "care economy" and high growth in public sector infrastructure spending partially offset the effects of policy tightening. As these offsetting factors gradually fade, coupled with the diminishing boost from last year's tax cuts, the effects of the previous tightening policies will continue to emerge. Even with the cash rate cumulatively decreasing by 75 basis points from its peak, current monetary policy remains in a state of mild tightening, a trend that will continue to be reflected in economic data throughout 2026.
After inflation data caused a stir, expectations of interest rate hikes were short-lived.
It is worth noting that after recent inflation data unexpectedly rose, the market quickly shifted course, pricing in interest rate hike expectations. Currently, market sentiment is gradually returning to rationality.
Industry analysts believe that while the Reserve Bank of Australia's previous warnings about the possibility of interest rate hikes were understandable, the labor market data was less optimistic than the inflation data, and the Monetary Policy Committee needed to weigh inflation concerns against the employment market trend. If subsequent inflation data does not exceed expectations, the likelihood of a short-term interest rate hike will continue to decrease.
Australian Dollar Technical Analysis
(AUD/USD daily chart source: FX678)
On Wednesday (December 17), the Australian dollar/US dollar exchange rate fluctuated around 0.6620 and is currently in an upward channel, reflecting a bullish bias. However, the exchange rate is currently near the 9-day exponential moving average, indicating a neutral price action in the short term.
The AUD/USD exchange rate is currently testing the lower boundary of the ascending channel represented by the 0.6620 level. A break below this channel would put downward pressure on the AUD/USD, potentially pushing it down to around 0.6414, the six-month low reached on June 21.
From a positive perspective, the AUD/USD exchange rate is poised to reach 0.6685, its highest level in three months, and could subsequently break through 0.6707, its highest point since October 2024. If it continues to rise, the exchange rate could even challenge the upper boundary of the upward channel at 0.6740.
The 2026 interest rate cut has completely fallen through.
According to a recent report by Westpac's economic research team, the bank has made a significant revision to its forecast for the Reserve Bank of Australia's (RBA) cash rate path. The report explicitly states that the RBA will maintain its current interest rate level throughout 2026, completely postponing the previously predicted rate cut windows in May and August 2026.
The report states that while the Reserve Bank of Australia (RBA) acknowledges that the recent unexpected rise in inflation data included temporary factors, it is sufficient to raise serious concerns about upside risks to inflation. The pace of inflation decline is a key variable – the RBA predicts that inflation will not return to the target range until the second half of 2026, and the cut-off mean inflation rate will be below the midpoint of the 2%-3% target range. This timeframe is far from sufficient to justify the RBA initiating interest rate cuts in 2026.
The report further provides a clear timeline: if inflation and the labor market move in line with expectations, February and May 2027 will be the best windows for the Reserve Bank of Australia to initiate interest rate cuts and unwind the remaining policy tightening measures.
Interest rate hikes are not impossible; the labor market is a "key variable."
Beyond the baseline forecast of maintaining interest rates unchanged, the market is more concerned about the potential risk of a policy shift. Westpac's analysis indicates that the Reserve Bank of Australia (RBA) will face a dilemma in its policy stance in 2026.
From a downside risk perspective, the performance of the labor market could be a trigger for interest rate cuts. The report states that if the labor market deteriorates significantly, a rate cut in 2026 could be reconsidered. Currently, the Australian labor market is gradually cooling, and the growth rate of labor costs is also slowing. If this trend accelerates, the Reserve Bank of Australia may be forced to adjust its policy stance earlier than expected.
However, upside risks should not be ignored. Following recent unexpectedly high inflation data, the market has begun pricing in interest rate hikes. While Westpac believes a short-term rate hike is not the baseline scenario, it has not completely ruled out the possibility. If inflation rises more than expected again in the remainder of the fourth quarter of 2025 or early 2026, it could disrupt the current policy balance. The report warns that if the Reserve Bank of Australia initiates a short-term rate hike, forecasts for Australian economic growth, medium-term inflation, and the labor market will all need to be revised downwards, and a policy tightening shift is highly likely in 2027.
The private sector takes over growth, and risks dissipate.
From the perspective of Australia's economic fundamentals, the current trend is largely in line with market expectations, which provides support for the Reserve Bank of Australia to maintain policy stability.
Data shows that the growth rate of public sector demand has slowed significantly, and even turned negative in the first half of 2025. In contrast, the growth rate of private sector demand is gradually recovering, and the risk that the market was worried about that "private sector growth will not be able to take over smoothly after the cooling of public sector demand" has gradually dissipated.
Notably, Australia's productivity growth has exceeded the Reserve Bank of Australia's previous pessimistic forecasts, which is seen as a significant positive signal of easing inflationary pressures. Westpac analysts believe that by 2026, the Australian economy will further overcome weak private sector demand and achieve more robust growth.
Policy lag effect becomes key: Downward trend in inflation remains unchanged
Regarding the future trend of inflation, Westpac Bank maintains its core judgment that "the downward trend remains unchanged," and the policy lag effect is an important basis for supporting this judgment.
"Many market commentaries are underestimating the lag in monetary policy," the bank's economic research team pointed out. The transmission of monetary policy to the labor market and inflation typically takes more than a year to show its peak effect. Current economic data mainly reflects the policy impact during the peak of cash interest rates a year ago. Therefore, the labor market is likely to cool further, and inflation will also decline accordingly.
The report explains that the previous expansion of the employment-intensive "care economy" and high growth in public sector infrastructure spending partially offset the effects of policy tightening. As these offsetting factors gradually fade, coupled with the diminishing boost from last year's tax cuts, the effects of the previous tightening policies will continue to emerge. Even with the cash rate cumulatively decreasing by 75 basis points from its peak, current monetary policy remains in a state of mild tightening, a trend that will continue to be reflected in economic data throughout 2026.
After inflation data caused a stir, expectations of interest rate hikes were short-lived.
It is worth noting that after recent inflation data unexpectedly rose, the market quickly shifted course, pricing in interest rate hike expectations. Currently, market sentiment is gradually returning to rationality.
Industry analysts believe that while the Reserve Bank of Australia's previous warnings about the possibility of interest rate hikes were understandable, the labor market data was less optimistic than the inflation data, and the Monetary Policy Committee needed to weigh inflation concerns against the employment market trend. If subsequent inflation data does not exceed expectations, the likelihood of a short-term interest rate hike will continue to decrease.
Australian Dollar Technical Analysis
(AUD/USD daily chart source: FX678)
On Wednesday (December 17), the Australian dollar/US dollar exchange rate fluctuated around 0.6620 and is currently in an upward channel, reflecting a bullish bias. However, the exchange rate is currently near the 9-day exponential moving average, indicating a neutral price action in the short term.
The AUD/USD exchange rate is currently testing the lower boundary of the ascending channel represented by the 0.6620 level. A break below this channel would put downward pressure on the AUD/USD, potentially pushing it down to around 0.6414, the six-month low reached on June 21.
From a positive perspective, the AUD/USD exchange rate is poised to reach 0.6685, its highest level in three months, and could subsequently break through 0.6707, its highest point since October 2024. If it continues to rise, the exchange rate could even challenge the upper boundary of the upward channel at 0.6740.
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