Could the RBA start cutting interest rates sooner than expected?

Australian borrowers have been given a glimmer of hope that interest rates could begin falling sooner than previously thought.

This follows news that Westpac Banking Corp (ASX: WBC) has brought forward its forecast for the Reserve Bank of Australia (RBA)’s first rate cut to August 2027.

However, interest rates could still rise again before any relief arrives next year.

Here’s what the bank is expecting.

Why Westpac changed its forecast

According to The Australian, Westpac Chief Economist Luci Ellis expects inflation to ease more quickly during 2027.

The bank believes inflation could fall enough for the RBA to start cutting rates in August next year, rather than waiting until early 2028.

Westpac sees those cuts coming gradually, at 0.25 percentage points each quarter.

However, the outlook for the next few months remains less positive for borrowers.

Rates could rise before they fall

At its meeting last month, the RBA left the cash rate unchanged at 4.35%.

The RBA’s May forecasts showed trimmed mean inflation staying above 3% until the middle of 2027, before easing to 2.5% by early 2028.

Westpac still sees an August rate rise as likely, although what happens after that is less certain.

A second increase in September also remains possible, but Ellis said it could be pushed back or dropped if inflation begins to ease.

The June quarter inflation figures, which are due on 29 July, will be crucial in deciding whether either increase goes ahead.

Any further increase would place more pressure on variable mortgage rates and borrowing costs, especially for those households already dealing with larger repayments.

But keep in mind, higher rates would not affect every borrower straight away.

Households on fixed-rate loans may be protected until their current term ends, while those on variable rates would usually feel the impact almost immediately.

The effect would also depend on whether banks pass on any RBA increase in full.

Why the RBA may take its time

Even if inflation starts to improve next year, Westpac doesn’t expect the RBA to rush into cutting rates.

The central bank lowered rates in 2025, only for inflation to pick up again. Because of that, Westpac thinks the RBA will want clearer signs that inflation is under control before lowering rates again.

The bank is still expecting rates to come down slowly, with much lower borrowing costs unlikely to return quickly.

For mortgage holders, the change gives some hope that relief could arrive sooner than previously thought.

However, the next move may still be higher, with Westpac tipping another rate rise in August.

The post Could the RBA start cutting interest rates sooner than expected? appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Teboneras 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.