‘Oh crikey!’ Westpac tips 2026 to bring more RBA cuts

Until Thursday, RBA cuts were largely expected to wrap up in 2025, but Westpac has changed its tune.

The big four bank’s chief economist, former Reserve Bank of Australia (RBA) assistant governor Luci Ellis, revealed its new position on the back of a predicted drop in inflation. 

“A lower inflation outlook now makes two further cuts in early 2026 likely,” she said.

It comes after continued progress on inflation saw the RBA’s monetary policy board cut the cash rate by 25 basis points in both February and May.

That marked a drop from its 12-year high of 4.35% to the current 3.85%.

Westpac is now forecasting the RBA’s preferred trimmed inflation measure will fall to below the central bank’s targeted midpoint of 2% and 3% by late-2025.

For reference, Australian Bureau of Statistics (ABS) data shows inflation grew 2.9% in the March quarter.

Price growth is expected to slow amid to persistent labour tightness, weakening population growth, and what Ms Ellis calls “soggy” economic activity and “surprisingly weak” wage gains

“If we are right, the RBA might be in for a bit of an ‘oh crikey!’ moment late this year,” Ms Ellis said.

RBA expected to hold in July

In the near term, however, the bank’s outlook hasn’t changed.

Westpac still expects the RBA’s next cut to come in August, with the RBA’s July meeting tipped to be a non-event.

It then predicts another drop in November and two more in February 2026 and May 2026.

“Though [the two 2026 cuts] could be earlier (December and February or February and March) if inflation and the labour market turn out weaker late in 2025 than we currently expect,” Ms Ellis continued.

Cash rate forecast to bottom out at 2.85%

Combined, Westpac’s forecasted cuts could see the cash rate at 2.85% by mid-2026 – a level not seen since late-2022.

That’s where NAB previously predicted the RBA would cut to, before reconsidering its outlook when its expectations of a 50 basis point cut in May were dampened.

NAB now expects the cash rate to fall to a low of 3.10% this cycle, while CommBank and ANZ believe it will drop to 3.35%.

Of course, forecasts are far from concrete promises.

Ms Ellis counters that, if the bank is wrong, it will most likely have overestimated the cash rate’s floor.

“It is possible that some of these cuts come a bit faster than the ‘cautious’ path we currently have pencilled in,” she concluded.

What will two 2026 cuts mean for home loan borrowers?

If Westpac’s forecast proves correct, a 2.85% cash rate could deliver significant relief for mortgage holders.

Assuming the Reserve Bank delivers four more 25 basis point cuts – and lenders pass all on in full – the average variable rate on a new owner-occupier home loan could fall to around 4.75% p.a.

That compares to around 6% p.a. in April, according to the latest RBA data, which considers the period before the central bank’s most recent cut in May.

For a borrower with a $500,000 mortgage, that drop in rates could reduce monthly repayments from about $3,000 to just over $2,600.

That’s a saving of nearly $400 per month, or around $4,675 per year.

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_{Image by Sam Wilson via Wikimedia Commons}