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.

Due to recent economic data, there is speculation that the central bank will increase rates on Tuesday. But is that the case? Let’s find out.

What will the RBA do with interest rates next week?

Unfortunately for borrowers, the market believes there is more chance of a rate hike next week than not.

According to the latest ASX 30 Day Interbank Cash Rate Futures February 2026 contract, the market is pricing in a 67% probability of a 25 basis point increase to 3.85%.

The team at Westpac Banking Corp (ASX: WBC) agrees with the market and believes that recent economic data points to a rate hike at next week’s meeting.

Commenting in the bank’s weekly economic report, Westpac’s chief economist, Luci Ellis, who used to work as assistant governor at the RBA, said:

When the economy is close to full employment and full capacity utilisation, it is hard to know which side of the line it is on. Inflation outcomes are the best guide in this situation. This is one reason why inflation gets the ‘casting vote’ at the RBA’s February meeting. With trimmed mean as the clearest signal of the underlying inflation trend, the 0.9%qtr, 3.4%yr quarterly result in the December quarter implies that the RBA is likely to raise rates at the February meeting.

However, Ellis notes that there is still a small chance that interest rates could be kept on hold. She adds:

There is still a small chance they hold (though it would be a split decision), and we expect the Board to debate the merits of holding versus raising the cash rate at the meeting. We are mindful of the messaging via the media that the RBA would hike if trimmed mean inflation remained above its 2–3% target and was drifting further away from the desired midpoint (our emphasis).

The run of quarterly data might not quite meet the second part of that test, though the case can be made that it does. There are also arguments to be cautious given that the new monthly collection has made the inflation data harder to interpret. But with market and public expectations already primed, the Board is likely to see little reason to wait.

What’s next for rates?

The good news is that Westpac believes this is where the rate hikes stop.

It is forecasting interest rates to stay on hold at 3.85% through to late 2027, before starting to retreat to 3.35% by early 2028.

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.