RBA Keeps Rates on Hold Through 2026 as Australia's Inflation Rate Remains Sticky Above Target

The Central Bank’s Cautious Stance on Monetary Easing

Westpac’s latest economic forecast has shifted expectations significantly: Australia’s Reserve Bank is unlikely to ease monetary policy throughout 2026, with potential reductions only materializing in early-to-mid 2027. The revised outlook stems from persistent price pressures that continue to keep policymakers in a defensive posture, despite earlier hopes for a faster policy normalization cycle.

The inflation rate in Australia has become the decisive factor reshaping rate expectations. Core inflation, which measures underlying price momentum, has rebounded above the RBA’s comfort zone of 2-3%, creating headwinds against any near-term policy relaxation. Governor Michele Bullock reiterated at the latest policy decision that inflation concerns remain elevated, effectively signaling that rate stability will persist longer than previously anticipated.

What Is the Inflation Rate in Australia? Market Implications

The resurge in Australia’s inflation rate, particularly the core measure, contradicts earlier expectations of a smooth disinflation path. This persistence has prompted Westpac analysts to push back their rate-easing timeline substantially. The bank now anticipates that conditions won’t normalize sufficiently until well into 2026, after which modest policy shifts may begin to materialize.

Following approximately 75 basis points of easing implemented in the prior year, the RBA faces a delicate balancing act. Further pressure from Australia’s inflation rate could force additional policy recalibrations, though Westpak Chief Economist Luci Ellis suggests that if current inflation forecasts materialize as expected, dramatic policy reversals remain unlikely.

Labor Market Dynamics and Policy Constraints

A tightening employment landscape adds another layer of complexity to the RBA’s decision-making process. Strength in labor demand could justify maintaining restrictive stance even if inflation begins moderating. Conversely, premature rate increases would risk derailing growth and employment gains, ultimately necessitating a policy reversal by 2027.

Ellis cautioned that elevated price pressures extending through late December or early 2026 could complicate the narrative significantly. However, the central bank’s overarching objective—threading the needle between price stability and labor market resilience—remains achievable if economic data cooperates.

Looking Ahead: When Will Policy Normalization Begin?

The timeline for the RBA’s first rate reduction has essentially shifted forward by a full year compared to earlier projections. Markets should prepare for an extended holding pattern while Australia’s inflation rate stabilizes within target ranges. Should disinflation accelerate unexpectedly, Westpac’s forecast framework remains flexible, but current baseline expectations point firmly toward 2027 as the realistic inflection point for monetary policy normalization.