Here’s what Westpac says the RBA will do with interest rates next week

Next week is looking like it could be a big one for Aussie mortgage holders, with the Reserve Bank of Australia (RBA) making its latest interest rate decision.

In May, the central bank raised the official cash rate by 25 basis points to 4.35%. This marked the third consecutive rate hike of the year in an effort to combat stubbornly high inflation.

Will the RBA make it four meetings in a row? Let’s see what Westpac Banking Corp (ASX: WBC) is expecting on Tuesday.

Will the RBA increase interest rates next week?

The good news is that despite inflation being above target, Westpac believes the RBA will keep the cash rate steady at 4.35% next week.

According to the latest Westpac Weekly economic report, the banking giant’s economics team believes the RBA Monetary Policy Board (MPB) will be wanting to see what impact its three hikes have on inflation before making any further moves.

Westpac’s chief economist, Luci Ellis, said:

We affirm our existing expectation that the RBA Monetary Policy Board (MPB) will hold the cash rate steady at its June meeting next week. Although inflation remains above target, the previous three rate increases have given the MPB time to assess cross-cutting trends of weak consumers and housing markets versus high inflation pressures and a secular boom in data centres and related investment. The recent run of inflation and labour market data has been a bit mixed, supporting the case for a pause.

However, the bad news for borrowers is that Ellis doesn’t necessarily believe that there won’t be more interest rate hikes later this year.

In fact, Westpac has pencilled in two rate hikes before the end of 2026, lifting the cash rate to 4.85%. Ellis adds:

It is notable that RBA Governor Bullock has characterised the three rate hikes delivered earlier this year as necessary to deal with the domestic inflation risks present before the Middle East conflict began, and that this “gives space” for the RBA to see how the conflict plays out.

Markets are increasingly adopting a sanguine view on the conflict despite a run of military strikes, seeing Brent oil generally trade between US$90 and US$95 per barrel over the past week, with the lower limit of that range tested overnight after President Trump announced a deal would be signed in coming days. While the RBA is set to pause in June, input cost inflation and the threat of broad-based passthrough still makes the case for further rate hikes in August and September.

When will rates come back down?

As things stand, Westpac expects the cash rate to peak at 4.85% and remain there until the end of 2027.

After which, it believes that rates will reduce to 3.85% by the end of 2028.

However, a lot could change between now and then, so time will tell if that is the case.

The post Here’s what Westpac says the RBA will do with interest rates next week appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.