Both Westpac and CBA have updated their forecasts, now joining NAB in expecting an additional rate hike in May.
Following the updated Statement on Monetary Policy (SoMP) from the Reserve Bank of Australia on Tuesday (3 February), two major banks have changed their forecasts for the cash rate trajectory this year.
While the market had previously been divided on whether the February move would be a “one and done” scenario, the central bank’s hawkish updated forecasts have pushed two more of the big four banks to join National Australia Bank (NAB) in predicting further tightening.
Westpac: ‘Priming themselves to raise rates again’
Westpac’s chief economist, Luci Ellis, noted that the RBA’s outlook has shifted significantly due to persistent price pressures and a stubborn jobs market.
“Things have changed – inflation is higher than it has been and although the Reserve Bank of Australia, correctly in our view, assess some of this to be temporary, it’s not temporary enough for their liking and they’re seeing stronger inflation in the near term,” Ellis said in a video update on Wednesday (4 February).
“And having updated their forecasts... seeing a labour market that is no longer easing... and an outlook of inflation that is not acceptable in the board’s mind… our assessment of their forecast is that they are priming themselves to raise rates again in May.”
Ellis highlighted that the RBA now views a restrictive policy as a necessity to pull inflation back, albeit slowly.
“With the cash rate at this level or a little higher as we expect, the RBA now sees monetary policy as being somewhat restrictive and that it needs to be. So, in their view, that means that inflation will start to come down again, but slowly,” she said.
While she suggested rates may eventually start dropping in early 2028 if the tightening has the desired impact, she cautioned that the near-term focus is strictly upward.
“But for the time being, the discussion is all going to be about where the RBA needs to do more. And I think we can be reasonably confident that another rate hike, probably in May, is on the cards,” Ellis said.
CBA: ‘The resolve of the RBA is stronger than we anticipated’
The Commonwealth Bank of Australia (CBA) also adjusted its call, with its head of Australian economics, Belinda Allen, pointing to a “large reassessment of capacity pressures” as the catalyst for the RBA’s shift.
“The RBA also now judge financial conditions are not as tight as previously thought given credit growth in the economy,” Allen said.
“Inflation forecasts have been revised higher as a result through the forecast horizon, particularly in the near term.”
CBA’s analysis suggests that the economy is hitting its “speed limit”, requiring “fine-tuning” via a second 25-basis-point lift in May to reach 4.10 per cent.
“There is unlikely to be enough hard evidence by May to prove that the initial rate hike is bringing down inflation and demand,” Allen noted.
“The labour market is in better shape than expected and the resolve of the RBA is also stronger than we had anticipated.”
She observed that the RBA has become more pessimistic about the supply side of the economy, noting a “clear positive output gap” and household spending that is rising “more briskly than they expected”.
“Trimmed mean inflation is expected to remain above 3 per cent through all of 2026. This is too high and will not be tolerated by the RBA,” she said.
NAB: The first to signal the shift
The move by Westpac and CBA brings them into alignment with NAB, which was the first of the majors to suggest that a single hike would not be enough to balance the economy.
NAB stressed that its dual 0.25 per cent hike outlook, which has been in place since late last year, had gained further validation following the fresh inflation figures.
Following the RBA’s unanimous decision on Tuesday, NAB’s economics team reiterated its stance: “NAB expects the RBA to deliver another 25bp increase in the cash rate in May; risks are biased towards more than 50bps of hikes. The RBA could also remain on hold at 4.1 per cent longer than we currently expect.”
NAB highlighted that the RBA’s core inflation forecast for June 2026 has increased by 110 bps in just six months, making a “one and done” scenario unlikely.
“A narrative which reflects an economy where ‘private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight’ means that this is unlikely to be a ‘one and done’ scenario for the RBA,” it said.
NAB’s analysts warned that if domestic activity continues to surprise on the upside, the central bank “may be forced to consider the need for a larger policy adjustment in 2026.”
ANZ thinks the RBA will be ‘pleasantly surprised’ on inflation
ANZ remains the only major bank to believe that this is the only rate hike for the year.
ANZ’s Adam Boyton, head of Australian economics, commented earlier this week that the bank expects the RBA may end up “(marginally) pleasantly surprised on the inflation front”.
“We also think that a likely slowing in real household income growth, the current low level of consumer confidence and today’s rate hike will see weaker consumer spending growth. As a result, while the RBA’s base case might be that another hike is more likely than not, we think that today’s action from the RBA Board should end up being the only move this year. Risks are clearly skewed to an additional hike, though, given the RBA’s focus on capacity being behind the H2 2025 lift in inflation,” he said.
[Related: Bullock warns inflation ‘too strong’ as RBA lifts CPI forecast]
