Westpac: RBA hold at 4.35% now looks entrenched

Westpac Group chief economist Luci Ellis said the Reserve Bank of Australia’s decision in August to keep the cash rate at 4.35% was broadly anticipated, but argued the central bank’s updated guidance points to a more durable pause. Ellis said the Board’s new wording indicates it would lift rates only if upside inflation risks materialise, which Westpac reads as a narrower bias to hike than before.

Westpac said the change in language suggests a “hawkish hold” rather than a clear shift away from tightening, but nonetheless one that looks increasingly embedded. The bank added that the Board weighed a rate increase at the meeting, yet the RBA’s own forecasts did not support taking that step.

Inflation prints and softer conditions shape Westpac’s view

In its assessment, Westpac said both headline inflation and trimmed-mean inflation have come in below the RBA’s May forecasts. The bank also said labour and housing market conditions have softened relative to what the central bank had earlier expected, reinforcing the case for a prolonged hold rather than a near-term move higher.

Westpac pointed to energy prices as another factor that has evolved differently from earlier fears. It said the initial and strong pass-through from higher energy prices has since tapered and, in Westpac’s view, has landed below the RBA’s assessment.

Labour market data changes add noise, other indicators point to easing Westpac said parts of the RBA’s labour-market read are more difficult to interpret because of recent changes to the Labour Force Survey. The bank argued that this makes it harder to compare some measures cleanly with earlier periods, potentially complicating how the RBA judges momentum in employment and related conditions.

Westpac Group

However, Westpac said other signals appear more straightforward. It cited capacity utilisation and firms’ reports about difficulty finding labour as indicators that point to clearer easing, aligning with its view that the bar for another hike has risen under the RBA’s revised guidance.

Westpac sees a hold through June 30, 2027, with a hike risk Westpac’s base case remains that the RBA holds rates through June 30, 2027. The bank characterised that outlook as a “hawkish hold” rather than a complete departure from a tightening mindset, reflecting the RBA’s emphasis on inflation risks even as recent data have been softer than expected.

At the same time, Westpac said a secondary probability of a later increase remains live. It said that if energy pass-through strengthens again, or if renewed Middle East escalation pushes inflation materially above the RBA’s forecasts by June 30, 2027, markets would need to price a higher likelihood of another rate rise.