Cuts expected from August 2025, continuing until May 2026
Australia’s economic slowdown is prompting Westpac to revise its interest rate forecast, now expecting four rate cuts that would bring the Reserve Bank of Australia’s (RBA) cash rate down to 2.85% – its lowest point in more than two years.
Westpac chief economist Luci Ellis said the first cut could come as early as August, followed by further reductions in November this year and again in early 2026. The updated projection reflects the bank’s view that softening growth and easing inflation have shifted the balance toward monetary easing.
“The risks remain on the downside. It is possible that some of these cuts come a bit faster than the ‘cautious’ path we currently have pencilled in,” Ellis said.
Australia’s annual economic growth slowed to 1.3% in the March quarter, which is significantly below the long-term trend of 3%, while GDP per capita has slipped into negative territory. Despite low unemployment at 4.1%, Ellis said subdued economic activity suggests the RBA may need to act sooner rather than later.
Westpac anticipates a 25-basis-point cut on August 12 after the release of June quarter inflation data. A second cut is likely on November 4, following the September inflation update from the Australian Bureau of Statistics.
Two more cuts are forecast for February and May in 2026, but Ellis flagged that the timeline could shift forward depending on how the labour market and inflation perform later this year.
“That would mean RBA cash rate will bottom out at 2.85%, from a peak of 4.35%, and 3.85% currently. We regard the cash rate at 2.85% as being at the lower end of the ‘neutral range’,” Ellis said. A neutral rate is one that neither slows nor stimulates economic activity.
While inflation is now within the RBA’s 2% to 3% target band, the central bank remains cautious. Its next policy meeting is scheduled for July 8, three weeks before the next major inflation data release, limiting the likelihood of immediate action.
