Mortgage holders are tipped to be spared more interest rate pain, but it is not all good news as a deepening housing downturn and cracks in consumer spending hit the national economy.
In welcome news for struggling mortgage holders, Westpac predicts November could be the last time the Reserve Bank needs to hike rates.
The Reserve Bank has lifted the cash rate in five of its last seven meetings – including on Melbourne Cup Day – to take the official rate from 3.60 to 4.85 per cent, the highest level in 18 years.
RBA governor Michele Bullock warned the fifth rate hike would “feel like a recession.”
End of the rate hiking cycle
Westpac chief economist Luci Ellis, who worked at the bank for more than 30 years, expects November’s interest rate hike will be the final one of a cash tightening cycle.
“It was already our view that the RBA was likely done hiking the cash rate after the November increase,” Ms Ellis wrote.
“Since then, our conviction on that call has strengthened”.
She conceded a February 2027 rare hike cannot be “ruled out” but said it was looking even less likely as signs from data and surveys point to a slowing economy.
“Given what we are seeing in the economy now, though, a rate hike in 2027 would require either a material new inflation shock that has not yet occurred, or would constitute a policy error on the part of the RBA,” Ms Ellis said.
Westpac’s economic view is based on expectations the all important trimmed mean inflation rate – which cuts out the top and bottom 15 per cent of items measured in the calculation – will fall back into the RBA’s target range of 2 to 3 per cent, in late 2027.
The other side of the RBA’s dual mandate – full employment – is likely to trend in the wrong direction, with the jobless rate pushing back above 5 per cent.
“Based on this revised forecast profile, an increase in the cash rate from here would be unlikely and – we would argue – undesirable,” she said.
Big four banks agree on rate forecast
It is a similar prediction across all four major banks with each of the predicting interest rates will now remain on hold.
Westpac, Commonwealth Bank, and National Australia Bank all predict the next cash rate move will be a cut in August 2027.
Meanwhile, the ANZ says households will have to wait until November 2027 for much needed rate relief.
CommBank head of Australian economics Belinda Allen said last November’s split decision on interest rates shows the bank is now worried about the downside risks to the economy.
“Overall though we think the RBA will remain on edge as we enter 2027 but will ultimately keep rates on hold,” Ms Allen said.
Australia’s economy to grow, but slowly
In the view of the major banks, the RBA has done enough to slow economic growth and get inflation back to target.
CommBank expects annual economic growth to trough at just 1 per cent in mid-2027, before recovering to 2.1 per cent by the end of 2028.
This would be slower than the fall in growth that the RBA expects, which is around 1.6 per cent in mid-2027 before cooling to 1.5 per cent at the end of 2028.
Meanwhile, industry experts including HSBC chief economist Paul Bloxham warns there is now a 50 per cent chance Australia goes into a recession.
It is a similar outlook for Westpac which predicts the slowing housing market over the past few months has hit harder than expected, while there are early signs consumers have stopped spending.
“Consumer income and spending have so far been quite resilient to pressures from fuel prices and rising interest rates,” Ms Ellis said.
“But our Westpac Card Tracker is starting to show that discretionary services spending is turning down again in quarter four, joining the discretionary goods category that was already quite weak.”
While Ms Ellis said conceded one quarter isn’t enough for a trend, she pointed out it does imply that the risks of further surprising resilience are fading.
“A deeper housing downturn and early signs of cracks in the consumer sector point to an even softer 2027,” she said.