Westpac economics already believed the Reserve Bank of Australia (RBA) was likely done lifting the cash rate.  

Now, fresh economic data has given us stronger conviction.

A sharper slowdown in the housing market, early cracks in consumer spending and falling oil prices all point to a softer economy in 2027. Westpac economics now sees unemployment rising about 5 per cent and underlying inflation returning to the RBA's target band. 

Because of this, we believe further interest rate hikes are not only unlikely, but undesirable.

What’s driving Westpac’s updated outlook?
 

• The housing market is cooling faster than expected: Over the last couple of months, property market turnover and financing activity have missed our earlier forecasts. Mortgage loan inquiries dropped further in October following September's rate hike - and that's before factoring in the full impact of the November increase.

• Early signs that consumers are starting to feel the pinch: While household income and spending have held up surprisingly well against high fuel prices and rising interest rates, things are shifting. Our Westpac Card Tracker shows that spending on discretionary services is heading downward in the fourth quarter, joining discretionary goods, which were already weak. We would not over-emphasise this point, but it does imply that the risks of further surprising resilience are fading.

• Businesses are turning cautious: Recent business surveys reveal weaker conditions and a sharp drop in forward orders. They also show that current inflation is mostly driven by non-labour costs, which businesses aren't fully passing on to shoppers. 

• Global oil prices are dropping: Oil and fuel prices are noticeably lower than what the RBA assumed when it finalized its last forecasts. Dated Brent crude is nearly a quarter lower, and spot Brent is down about 15%. This greatly reduces the risk of fuel costs spilling over into general consumer prices.

What’s next for interest rates?

During her post-meeting media conference, RBA Governor Bullock noted it was a good time to "take stock" of the rate hikes made so far. Both the market and our team read this as a strong signal that the RBA will pause at its December meeting.  

The unusually split 6:3 vote at the November board meeting also suggests some board members are increasingly mindful of the risks of over-tightening.

While a rate hike in February 2027 can't be completely ruled out - the RBA will certainly discuss it - it’s looking less likely. Based on what we’re seeing now, for the central bank to raise rates again next year, we would need to see a major new inflation shock that hasn't happened yet.

By the time February rolls around, we expect the data to clearly show that the Austaerlian economy - and inflation - is slowing down.

A version of this story was first published on Westpac IQ.