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

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Last week was an eventful one for interest rate expectations.

A week ago, many experts were predicting that the Reserve Bank of Australia (RBA) would be cutting interest rates again when it meets on Melbourne Cup Day.

But a surprising uptick in inflation has cast significant doubts on what action the central bank will take at Tuesday’s meeting.

So, let’s see what economists at Westpac Banking Corp (ASX: WBC) are expecting following this key economic data release.

Will the RBA cut interest rates next week?

Unfortunately, the economics team at Westpac believes that homeowners will have to wait at least another quarter for any further relief on their mortgage repayments.

In a note, chief economist, Luci Ellis, revealed that she expects the central bank to wait for another quarterly inflation reading before making its next move. She said:

[T]he release of higher-than-expected inflation data will have spooked the RBA and taken a cash rate cut off the table for November. We never expected a follow-up cut in December, noting the RBA Monetary Policy Board’s (MPB) preference for caution.

And while there is a chance of a cut in February if other economic data falls into place, this is seen as unlikely by the chief economist. Ellis adds:

There is a pathway to a February rate cut, but only if the labour market deteriorates more than expected in the next couple of months, and the emerging consumer recovery falters quickly. This is not our expectation.

She then adds:

Although we expect the December quarter inflation data to be a lot less scary than the September quarter, we think it will take more than one quarter of data to convince the RBA that the inflation trend is still consistent with target beyond the short term. This is particularly so given that a couple of CPI categories, including home-building prices and AV-related services, do look to be seeing a sustained pick-up.

But the good news is that Ellis does expect two further cuts to interest rates next year. So, relief is likely to be on the way, but just not in time to support any shopping plans during the holiday period. She concludes:

Our base case therefore moves to two cash rate cuts, in May and August, with a decent chance of a later timing and larger number of cuts if the RBA has been so spooked by this week’s inflation data that it delays even further.