‘Two more cuts’: Economists tip RBA rate relief in 2026

Hopes are fading that the RBA will deliver households a Christmas rate cut gift, but two of the Big Four banks still expect the cash rate will fall in 2026.

Both ANZ and Westpac are predicting a cut next year, with ANZ arguing that the RBA will likely lower the cash rate as early as February.

Westpac chief economist Luci Ellis – who was the RBA’s assistant governor of economics for almost seven years- told realestate.com.au the bank is tipping two more rate cuts next year, most likely in May and August.

“We regard inflationary policy as still a bit tight,” Ms Ellis said.

“We see some modest softening in the labour market already underway and likely to continue. And if inflation plays out according to our forecasts, which have trimmed mean inflation troughing at around 2.3%, then the RBA will have to cut some more,” she said.

“However, if we’re wrong, and inflation plays out according to the RBA’s forecast, then rates will be on hold.”

The trimmed mean is the RBA’s preferred method of gauging underlining inflation, and excludes volatile items from the CPI basket. Ms Ellis said the RBA would need to see more than one quarter of benign trimmed mean data to confidently cut rates in 2026.

Experts are divided about the prospect of rate cuts next year. Headline inflation for the September quarter came in at a higher-than-expected 3.2%, while the trimmed mean also rose to 3%. The October unemployment figure eased to 4.3%, down from 4.5%.

ANZ senior economist Adelaide Timbrell, who expects another interest rate cut to come as early as February, said the lower unemployment rate in the October labour force data makes it “unlikely that the RBA will cut rates before 2026,” but noted new jobs and inflation data will be released before the February meeting.

The recent inflation spike prompted NAB to join Commbank in tipping no further rate cuts for the foreseeable future. At its most recent November meeting, which was held after the softer unemployment figure and CPI data was released, the RBA held the cash rate steady at 3.6%, which NAB and Commbank now believe is the neutral setting for rates.

However, Ms Ellis said despite the recent dip in the unemployment rate, the jobless rate was trending up overall, and while there was a genuine uptick in housing-related inflation, this is “not a consistent story”.

“Some of what we saw [in the most recent data] is noise and factors that we don’t necessarily think are ongoing,” Ms Ellis said.

When asked about the likely impact of US Donald Trump’s trade war on the RBA’s decision-making, Ms Ellis said Australia is much more economically tied to China and south-east Asian nations than America.

“China is far more important to Australia than the US, and China is engaging in stimulus to make sure that its economy keeps growing,” Ms Ellis said.

“That’s good for Australia. What’s more, it’s doing it in ways that tend to reduce prices so that’s disinflationary and good for the rest of the world.”

Ray White chief economist, Nerida Conisbee, has also argued that rate cuts are still in play and the economy is slowing, albeit not uniformly.

“Retail spending remains subdued, business surveys point to deteriorating conditions, and credit data show ongoing strain for small businesses and segments of the housing market,” Ms Conisbee said.

Meanwhile, Compare the Market’s economic director, David Koch, said that future rate cuts were only likely if unemployment lifted significantly.

“The only thing that will possibly bring a rate cut into the future is if unemployment rises considerably, and we’ve seen that happening in the United States,” he said, referring to the October cut by the US Federal Reserve owing to an uptick in unemployment rather than a moderation in inflation.

“The Reserve Bank has two jobs: keep inflation under control and keep Australians in work. So, if there’s a big jump in the unemployment rate, you might see the Reserve Bank thinking to itself, ‘Okay, we’ll sacrifice inflation and the problems with inflation, to keep Aussies in work’ and will cut rates,” he said.

The next RBA decision is due on Tuesday, December 9, but markets are betting on an above 90% chance they will remain unchanged, according to the ASX’s RBA Rate tracker.

In the minutes of its November meeting, the RBA acknowledged that the economic data, in contrast to the clear inflationary trend of 2024, painted a “mixed picture”. The central bank noted it was too early to rule out further cuts, but expected the trimmed mean to stay elevated.

“While the staff do not expect quarterly inflation to be as strong in the December quarter as in the September quarter—as some of the recent increase was judged to be due to temporary factors—underlying inflation was now expected to be above 3% until the second half of 2026,” the board said.

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