The action is working, but growth is weakening
Australia's largest financial institutions are recalibrating their expectations for the cost of money, with three of the four major banks now forecasting that the Reserve Bank of Australia's long campaign against inflation is drawing to a close. The shift reflects a quiet but significant turn in economic sentiment — a collective judgment that the damage of high rates may soon outweigh the danger of lingering price pressures. Yet the picture is not uniform: one major bank holds a harder line, and financial markets remain unconvinced, reminding us that economic forecasting is as much an act of interpretation as it is of calculation.
- Three of Australia's four biggest banks have pivoted sharply, now expecting rate cuts to begin in mid-2027 — a forecast that would have seemed premature just months ago.
- Westpac refuses to follow the consensus, warning that inflation could still peak at 4.7% and that the RBA may need to raise rates twice more before any relief arrives.
- Financial markets are betting against the banks entirely, pricing in a better-than-even chance of a rate hike within twelve months — a direct challenge to the emerging consensus.
- The RBA sits at the center of competing pressures: sticky inflation, slowing growth, hawkish market signals, and now a chorus of major lenders urging restraint.
- For millions of Australian households carrying mortgages, the trajectory of these forecasts is not abstract — it is the difference between financial strain and breathing room.
Australia's economic outlook shifted meaningfully this week as ANZ, Commonwealth Bank, and NAB each revised their forecasts to predict interest rate cuts beginning around mid-2027. The move marks a notable departure from earlier expectations, with ANZ making the sharpest turn — abandoning its previous view that rates would simply hold indefinitely and now anticipating two cuts next year.
HSBC economist Paul Bloxham added weight to the shift, acknowledging that inflation remains elevated and may rise further before falling, but arguing that the RBA's aggressive tightening has already done much of its work. In his view, it will be weakening economic growth — not the defeat of inflation — that ultimately prompts the central bank to begin easing.
Westpac, however, is not persuaded. Chief economist Luci Ellis maintains that the RBA will need to raise rates again in August and September, with inflation still expected to peak near 4.7% later this year. On her timeline, cuts remain a 2028 story — a full year behind the emerging consensus.
Financial markets complicate the picture further. Traders are currently pricing in more than a 50% chance of a rate hike within the next twelve months, suggesting deep skepticism that the RBA will hold steady as the major banks expect. The central bank now faces a genuinely contested landscape — pulled between slowing growth, persistent price pressures, and market participants who believe the tightening cycle has further to run. How it reads these competing signals will have direct consequences for the borrowing costs of Australian households and businesses in the years ahead.
The economic consensus in Australia shifted noticeably this week, with three of the country's four largest banks signaling that interest rate cuts are coming sooner than they previously thought. The Reserve Bank of Australia has spent months raising rates to combat inflation, but the banks' chief economists now believe that phase is ending.
ANZ made the most dramatic move, reversing its earlier forecast that rates would simply hold steady indefinitely. The bank now expects two rate cuts in 2027, beginning around the middle of the year. Commonwealth Bank and NAB have arrived at similar conclusions, both predicting the RBA will pause its rate-hiking cycle before cutting twice in mid-2027. HSBC economist Paul Bloxham also shifted his view, moving from expecting rates to stay elevated through late 2027 to now anticipating cuts in the latter half of that year. Bloxham acknowledged that inflation remains elevated and will likely climb further before falling, but he argued that the RBA's aggressive action so far is already working. He suggested that weakening economic growth, rather than persistent price pressures, will ultimately convince the central bank to stop holding rates steady and begin lowering them.
The shift reflects a growing belief among major financial institutions that the worst of the inflation surge has passed. The RBA's rate increases have done their job, the thinking goes, and continuing to hold rates at elevated levels risks unnecessary damage to economic growth. The banks' economists expect the RBA to remain on hold at its June meeting, with no further hikes this year.
But not everyone agrees. Westpac stands apart, maintaining its forecast that the RBA will raise rates again in August and September before pausing. Westpac's chief economist, Luci Ellis, predicts inflation will peak at 4.7 percent late this year—lower than her previous estimate but still above what the RBA itself is now forecasting. Westpac sees no rate cuts arriving until 2028, a full year later than the consensus view.
Financial markets, meanwhile, are betting differently still. Traders are pricing in a greater than 50 percent chance of a rate hike within the next twelve months, suggesting they remain skeptical that the RBA will hold steady as the banks expect. This divergence between bank economists, the central bank's own guidance, and market expectations creates genuine uncertainty about what the RBA will actually do. The central bank faces pressure from multiple directions: inflation that remains sticky, growth that is slowing, and financial markets that expect more tightening even as major banks argue the time for cuts is approaching. How the RBA navigates these competing signals over the coming months will shape borrowing costs for millions of Australian households and businesses.
Notable Quotes
Inflation is still too high and is set to rise further before it falls. That being said, the RBA has already taken significant action to deal with this surge in inflation—and, critically, the action is working.— Paul Bloxham, HSBC economist
The Hearth Conversation Another angle on the story
Why did three banks suddenly change their minds about rates at the same time?
They're reading the same data—inflation is still high, but the RBA's rate increases are actually working to bring it down. The question shifted from "will rates keep rising" to "when do we start cutting."
But Westpac disagrees. What do they see that the others don't?
They think inflation will stay elevated longer. At 4.7 percent, it's still well above the RBA's comfort zone. They're being more cautious about declaring victory too early.
And the financial markets are betting on another hike. Who's right—the banks or the traders?
That's the tension. Markets are pricing in risk the banks think is fading. It's possible both are right in different ways—rates might go up once more before the cuts begin, even if the overall trend is toward lower rates.
What does this mean for someone with a mortgage?
If the banks are right, your rate will stop climbing soon and start falling by the middle of next year. If Westpac is right, you're waiting another year longer. Either way, the era of rising rates is ending.
How confident are these forecasts?
Confident enough that three major banks moved their official positions. But the fact that markets still expect a hike shows there's real uncertainty. Economic forecasting is always provisional.