Westpac Sees RBA Hold as Entrenched Through Mid-2026, Citing Softer Inflation and Labour Data
Key Takeaways
- •The RBA held the cash rate at 4.35% for August, extending a pause that began in November 2023, while the ECB, Bank of England, and Bank of Canada have each started cutting rates in 2024.
- •Westpac interprets the RBA's narrowed guidance — conditioning future hikes only on materialising upside inflation risks — as signalling that an extended hold has become the Board's implicit base case.
- •Both headline and trimmed mean inflation have printed below the RBA's May forecasts, and labour and housing markets have come in weaker than expected, strengthening the Bank's view that current policy settings are somewhat restrictive.
- •Westpac maintains its base case of a rate hold through mid-2025 but warns that a further hike this year remains possible if energy-related inflation pass-through or Middle East conflict escalation exceeds current expectations.
- •Westpac criticises the RBA for treating the AI investment boom purely as an inflation risk without accounting for potential productivity gains, and argues that downside inflation risks deserve equal attention to the upside risks the Bank has chosen to emphasise.
The Reserve Bank of Australia's decision to hold the cash rate at 4.35% in August — the rate it has maintained since November 2023 — was fully anticipated, according to Westpac Group chief economist Luci Ellis, who argues the more revealing signal lies in how the Board's guidance has shifted rather than in the rate decision itself. The hold leaves the RBA as an outlier among several major central banks, with the European Central Bank, Bank of England, and Bank of Canada all having begun cutting rates earlier in 2024.
The accompanying statement said the Monetary Policy Board stands ready to raise rates only if upside risks to inflation materialise — language Ellis describes as narrower and more specific than the broader "if needed" framing used in May. Westpac reads this as evidence that the RBA has effectively concluded an extended hold is now its base case, even though the Board has not explicitly said so.
That conclusion follows a run of data that has moved against the Bank's earlier hawkish positioning. Both headline and trimmed mean inflation have printed below the levels the RBA forecast in May, while the labour market and housing market have both come in weaker than expected. Westpac notes that the initial pass-through from higher energy prices arrived quickly and in significant size — consistent with the bank's own earlier call — but has since tapered off and undershot the RBA's expectations.
Ellis draws a clear distinction between this meeting and the June gathering, when a hike was not even on the table because the Board was in a wait-and-see posture ahead of the second-quarter CPI print. This time, a hike was genuinely discussed, but the RBA's own forecasts, which show inflation dropping below the midpoint of its 2–3 per cent target band by 2028, ultimately did not support taking that step. Softer inflation and labour outcomes have also strengthened the Bank's confidence that current policy settings are somewhat restrictive, a judgement it held with less conviction earlier in the year.
Even so, the RBA is not prepared to close the door on further tightening. Westpac says the Board remains concerned that pass-through from energy prices into broader inflation could persist longer than currently expected, and that any fresh escalation in the Middle East conflict could push energy prices — and associated pass-through — higher than forecast. This leaves a live, if secondary, probability of a further hike still to be priced through the remainder of the year, contingent largely on how far energy-related pass-through and Middle East developments run from here.
The RBA also continues to view the labour market as somewhat tight. However, Westpac notes that some of the usual gauges have been distorted by changes to the Labour Force Survey, while cleaner measures such as capacity utilisation and reported difficulty finding suitable labour point to a more definitive easing trend.
Westpac raises a further tension in the RBA's own analysis around artificial intelligence and data centre investment. The Statement on Monetary Policy treats the AI boom as an inflation risk — through pressure on domestic construction capacity and global semiconductor demand — yet does not factor in any offsetting productivity benefit from that same investment, despite acknowledging the boom has run stronger than the RBA expected in May. Ellis also questions why the Bank's forecasts show only limited evidence of construction labour being drawn away from other projects toward data centre builds, suggesting an implicit assumption that this crowding out is nonetheless occurring.
Westpac's base case remains an RBA hold running through to the middle of next year, characterised as a hawkish hold rather than a clean signal that the tightening cycle has ended, given the Board's continued emphasis on upside inflation risk. The bank says investors should allow for some probability of a further hike later this year, even though that scenario sits outside its central forecast, and argues that downside risks to inflation deserve as much attention as the upside risks the RBA has chosen to highlight.
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