Westpac revises call, sees RBA cutting to 3.60% in July

Westpac's economics team, headed by former RBA assistant governor Luci Ellis, previously expected the July meeting to be a non-event, with the August meeting bringing a downwards move. 

Now, it's forecasting the July event will see the cash rate cut by 25 basis points to 3.60%, while the August meeting is tipped to bring a hold.

The RBA board meets on 7 July, with its decision to be announced on Tuesday 8 July.

Downside inflation surprise twists Westpac's arm

While likely good news for struggling home loan holders, Ms Ellis cautioned against becoming too excited.

"This is not the shoo-in that markets seem to think it is," she said on Thursday.

"Yes, the May monthly CPI indicator came in below even the low number that we expected … but the June quarterly inflation numbers are still likely to print on the high side, so some caution on the inflation outlook is likely and warranted."

Inflation figures released by the Australian Bureau of Statistics on Wednesday showed the RBA's preferred trimmed mean read had fallen to 2.4% year-on-year.

That saw it sitting below the midpoint of the central bank's targeted 2% to 3% band.

While most economists prefer the more reliable quarterly inflation readings, due on 31 July, the May inflation rate was notably lower than the market had expected.

It was also lower than recent RBA predictions, which show trimmed mean inflation falling to 2.6% on an annual basis by mid-2025 and remaining there for the foreseeable future.

The downside surprise was enough to convince CommBank economists that a July rate cut was imminent, while NAB has long forecast the same.

"One month's data ordinarily wouldn't – and shouldn't – determine the RBA's forecast and decision-making," Ms Ellis continued, pointing to RBA governor Michele Bullock's recent caution about the May inflation figures.

"This was an explicit steer that the RBA's thinking in May was that it did not plan to do back-to-back cuts but would wait for the quarterly CPI ahead of its August meeting.

"And they still might do that, but it is harder to justify now."

RBA inflation forecasts 'more of a message': Westpac

Ms Ellis also described the RBA's inflation forecasts "more of a message than a true forecast".

"That message was that they are still worried about domestic inflation pressures [and] it thought it would end up cutting by less than the market was pricing in May," she said.

"We expect that the inflation evidence will overtake the RBA's thesis of domestic tightness over time.

"But we do not think they are going to start singing from an entirely different song sheet just yet.

"Rather, what we are about to see is an RBA that was planning to cut rates soon anyway deciding it may as well get on with it rather than make a contestable argument for further delay."

More RBA cuts (or hikes) to come?

Beyond shifting its prediction of the next cash rate cut from August to July, Westpac stands by its previous call.

It's still forecasting another cash rate cut later in 2025 and two more in 2026, noting there's still potential the final two cuts come sooner than expected, leaving the cash rate at 2.85%.

CommBank, meanwhile, expects a cut in July, followed by another in August, and a final move in late 2025 or early 2026.

NAB's forecast is broadly similar.

ANZ is the only big bank expecting the RBA to hold the cash rate in July, instead cutting in August and not again until February.

"We see such a course as broadly consistent with our read on the domestic economy," ANZ head of Australian economics Adam Boyton and senior economist Adelaide Timbrell said on Thursday, citing the strong labour market and resilient household incomes.

Still, they conceded a July cut could act as "insurance" – and warned too much easing too soon could lay the groundwork for rate hikes again by late 2026 or early 2027.

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