Lower-than-expected inflation has changed the interest rate outlook, with Westpac now forecasting no further rate hikes this year. (Image: Sydney’s George St, via Pexels)
Lower-than-expected inflation has prompted Westpac to revise its interest rate outlook, with chief economist Luci Ellis now expecting the Reserve Bank of Australia (RBA) to keep rates unchanged for the rest of 2026.
The change follows the release of June quarter inflation data, which came in lower than both Westpac and the RBA had expected, especially across services and housing-related costs.
The Australian Bureau of Statistics (ABS) reported annual inflation eased to 3.8 per cent in the year to June, down from 4.0 per cent in May, while the Consumer Price Index fell 0.1 per cent in June.
Until now, Westpac had been forecasting another rate hike at the central bank’s upcoming August meeting.
But "inflation has been more benign than we feared and the RBA forecast," Ellis said in her updated forecast, noting “market services inflation and the all-important housing-related components both came in below expectations."
The ABS said housing costs remained the largest contributor to inflation, rising 6.8 per cent over the year.
Both food and non-alcoholic beverage, and recreation and culture prices, increased 3.3 per cent.
Ellis said the softer inflation outcome had reduced the chance for another rate rise.
"Below-expectation inflation was needed to rule out the hike, which is what we got," she said.
While Westpac no longer expects rates to rise this year, its chief economist said the RBA is still expected to “stay hawkish” and keep the door open to further hikes if inflation accelerates again.
A version of this story was first published on Westpac IQ.
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