Westpac economists have revised their outlook for the Reserve Bank, now expecting the cash rate to fall to 2.85% by Q2 2026 on the back of softer inflation and weak domestic demand.
Australian confidence edged higher in June, with the Westpac-Melbourne Institute Consumer Sentiment Index rising 0.5% to 92.6. While an improvement, it remains below the neutral level of 100.
“At 92.6, the headline index remains well above the deep lows over 2022–24, but still some way below the neutral threshold of 100, consistent with a degree of ‘cautious pessimism’,” said Westpac’s Ryan Wells (pictured above), Illiana Jain, and Elliot Clarke (pictured, left to right).
Consumers were still influenced by global uncertainty.
“Offshore developments are still weighing on consumer’s minds, with 77% of respondents recalling news on the topic as ‘unfavourable’,” the Westpac team said.
Although lower inflation has helped sentiment, real per capita income losses have dulled spending appetite.
“Views on family finances versus a year ago and expectations for the year-ahead remain almost 14% and 7% below their respective long-run averages; meanwhile, the ‘time to buy a major household item’ sub-index is still 19% below its long-run average,” the economists said.
Westpac has now revised down its inflation forecasts, citing slower population growth and increasing downside risks to economic activity.
“This week, we revised down our forecasts for inflation, incorporating a faster unwind of population growth in the near-term and downside risks to activity; we now expect underlying (trimmed mean) inflation to fall below the mid-point of the target band for a time,” the Westpac economists said.
Westpac chief economist Luci Ellis expects this to support a longer easing cycle.
“These developments are likely to see the RBA’s policy easing cycle extend into the first half of 2026, seeing the cash rate trough at the lower end of our estimate of the neutral range at 2.85%,” she said.
Westpac has retained its near-term forecast of a 25bp cut in August – not July – and another in November. Two further cuts are now expected in early 2026 (February and May), though these could come sooner if inflation and the labour market weaken more than expected later in 2025.
“Let’s not get ahead of ourselves,” Ellis said. “The board described itself as having a preference to move cautiously and predictably. This is code for not wanting to do back-to-back cuts.”
The minutes also clarified that easing is about “reducing restrictiveness, not moving quickly back to neutral in the style of the Federal Reserve.” The RBA is unlikely to move rates simply because markets price it in.
Even weak GDP data hasn’t changed the RBA’s near-term thinking.
“Nothing that has happened since… is likely to shift the dial,” Ellis said, adding that the upcoming May labour force and CPI data is unlikely to alter their cautious course.
Looking forward, however, Ellis noted “the arguments in favour of doing more than 50bps more (two cuts) are building,” particularly as population growth slows and private sector demand softens.
She said Westpac now expects trimmed mean inflation to drop below the 2.5% target midpoint by year-end – something not previously forecast.
“If we are right, the RBA might be in for a bit of an ‘oh crikey!’ moment late this year,” Ellis said.
The latest NAB business survey reinforced the weak growth outlook, with business conditions falling to 0 in May – the lowest level since the pandemic.
“The business conditions index, having been trapped in a consistent downtrend for the past three years, fell to 0 in May,” the Westpac team said. “This is the weakest reading since the pandemic and suggests private demand may remain on a shaky footing through mid-year.”
Still, offshore concerns haven’t rattled business owners just yet.
“Australian businesses seem broadly unphased by offshore developments. Although, with the confidence index hovering around a neutral level of 0, the survey is hardly signalling a near-term rally in economic activity,” the economists said.
For more information, read Cliff Notes: necessary relief and the Westpac Australia & New Zealand Weekly.
