RBA Rate Cut Expected as Banks Reverse Hike Forecasts, June 11

Australia’s two largest banks have abandoned rate hike forecasts and now expect the Reserve Bank to cut interest rates in 2027. Commonwealth Bank and NAB cited weak economic growth, falling home prices, and soft consumer sentiment as reasons for the reversal. This signals a major shift in monetary policy expectations as inflation moderates and economic headwinds intensify.

Banks Flip on Rate Outlook

Commonwealth Bank and NAB both reversed their forecasts this week, now expecting the RBA to hold the official cash rate at 3.35% through 2026 before cutting rates in the first half of 2027. NAB chief economist Sally Auld said “the next move in the cash rate is likely to be down, but the timing is uncertain.” The banks cited weak consumer sentiment, falling home prices, and broader economic slowdown as reasons for the change.

Economic Weakness Mounts

Australia’s economy slowed sharply in the March quarter with GDP growth at just 0.3%, while per capita GDP fell 0.1%. Unemployment is rising faster than the RBA expected, and the housing market has stalled with values trending lower across capital cities. NAB warned that “should activity data weaken more quickly than anticipated, the RBA will cut earlier than we currently forecast.”

Inflation Still Above Target

Core inflation remains elevated at 3.3% above the RBA’s 2% to 3% target band. However, Westpac expects inflation to moderate later in 2026, with rate cuts feasible in February and May 2027. Recent wage rises, including a 6% minimum wage increase and 4.75% award pay rises, risk pushing inflation higher and complicating the RBA’s path forward.

Market Still Pricing Hikes

Interest rate futures markets have not yet aligned with the banks’ views. Futures still forecast one more rate hike this year, despite the economic slowdown. This disconnect suggests investors remain uncertain about the RBA’s next move, with some still betting on tighter policy despite mounting economic pressure.

Final Thoughts

Major banks now expect RBA rate cuts in 2027 as economic weakness accelerates. With GDP growth stalling and unemployment rising, the data supports a shift toward easing, though inflation remains a constraint. Investors should watch for the RBA’s next decision to confirm this pivot.

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