2026-01-28 02:32:00
Westpac says persistent core inflation leaves the RBA little choice but to hike in February, while favouring a cautious wait-and-see stance thereafter.
Summary:
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Westpac now expects a 25bp RBA hike in February
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Trimmed mean inflation seen as delivering the “casting vote”
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Underlying inflation momentum still uncomfortably high
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February move framed as likely one-off, not a hiking cycle
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RBA expected to retain a conditional tightening bias
Westpac has joined its major bank peers in forecasting a 25 basis point rate hike from the Reserve Bank of Australia at the February meeting, arguing that persistently elevated inflation has delivered the “casting vote” for tighter policy. With trimmed mean inflation printing well above comfort levels for a second consecutive quarter, Westpac now expects the RBA to lift the cash rate to 3.85%, while maintaining a base-case view that the move will be one-and-done rather than the start of an extended hiking cycle.
Westpac’s analysis centres on the difficulty of precisely identifying economic slack when the economy is operating close to full employment and near full capacity utilisation. In that environment, inflation outcomes become the most reliable guide for policy. The December quarter inflation data, particularly the 0.9% q/q rise in trimmed mean inflation and the 3.4% y/y pace, is viewed as sufficiently uncomfortable to warrant renewed tightening.
The bank argues that underlying inflation momentum now sits above levels consistent with a smooth return to the RBA’s 2–3% target band, leaving the central bank little room to delay action. This mirrors the logic already advanced by NAB and CBA, which have been calling for a February hike since December, and aligns with ANZ’s shift following the upside CPI surprise.
Beyond the February decision, Westpac sees the outlook becoming more finely balanced. Recent data imply a higher inflation starting point than assumed in the RBA’s November Statement on Monetary Policy, reflecting firmer labour market conditions and a clearer upswing in consumer spending. These forces argue for caution in declaring victory on inflation.
At the same time, Westpac highlights emerging offsets that could temper the need for a prolonged tightening phase. Financial conditions have tightened via higher market pricing for interest rates, and the Australian dollar has strengthened noticeably, both of which should help restrain demand and dampen the inflation trajectory over time.
As a result, while Westpac expects the RBA to act in February, it does not anticipate an automatic follow-up. Policy is already judged to be restrictive, and the remaining disinflation task is relatively modest. The most likely outcome is a wait-and-see approach after February, paired with clear communication that the RBA stands ready to act again if inflation fails to moderate as expected.
With the four major banks now forecasting a February hike, attention is shifting from the decision itself to how forcefully the RBA signals its conditional tightening bias.
