Mortgage brokers may need to prepare clients for a softer economic backdrop and further interest rate tightening, with Westpac’s latest leading indicator pointing to slower growth ahead even as the Reserve Bank (RBA) weighs another cash rate hike.
Westpac expects Australia’s GDP growth to slow to about 2% in 2026, down from 2.5% last year and below trend.
The six‑month annualised growth rate in the Westpac–Melbourne Institute Leading Index held at +0.08% in February, unchanged from January but down from stronger readings in late 2025. The index tracks the likely pace of economic activity relative to trend three to nine months ahead.
“Momentum remains a touch above average in early 2026 but is likely to drop in coming months as the RBA’s latest interest rate hike impacts and we start to see the fuller effects from conflict in Middle East,” said Matthew Hassan (pictured), Westpac head of Australian macro‑forecasting. He added that “these signals should become much clearer as we move into March and April.”
Financial market components have been the main drag on the index. A cooling sharemarket has seen the S&P/ASX200 contribution move from a solid positive to flat, with current readings suggesting it will become “an outright drag” next month. The yield spread between 10‑year government bonds and 90‑day bank bills has also contributed less, as RBA rate hikes push up short‑term interest rates.
Offsetting some of that weakness, commodity prices have provided a boost. Westpac notes a 13% rally in prices in US dollar terms since September, translating to around a 4% gain in local currency after accounting for a stronger Australian dollar. That has added about 0.13 percentage points to the leading index growth rate. Aggregate hours worked have also contributed positively.
However, Hassan warns that “developments around both interest rates and the Middle East conflict also look likely to have a more pronounced drag” on other components, particularly consumer sentiment, in coming months.
In a separate analysis of the energy shock, Westpac estimates the Middle East conflict could briefly push Brent crude towards US$110 per barrel in Q2, lifting Australian headline inflation through 2026.
RBA’s Monetary Policy Board meets again on 4–5 May. While the index is still slightly positive, Westpac says the detail suggests momentum is “susceptible to a weakening near term” as higher mortgage rates and energy costs filter through.
Another 25-basis point rate hike “looks likely” at the May meeting, prolonging pressure on variable mortgage rates and raising the stakes for brokers helping clients stress‑test repayments and choose between fixed and variable strategies.
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