Last year was a good one for homeowners, with the Reserve Bank of Australia (RBA) making several cuts to interest rates.
This left the cash rate at 3.6% at the end of the year.
However, while many economists were for some time forecasting further cuts in 2026, that all changed late in 2025 after economic data supported a case for interest rate hikes this year.
But what is actually going to happen? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is predicting from the RBA.
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Where are interest rates going in 2026?
The good news for mortgage holders is that Westpac thinks it will be a quiet year for RBA governor Michele Bullock.
According to its latest weekly economic report, the bank's economics team believes that the central bank will keep interest rates on hold for the entire year. No cuts, no hikes. Just rates on hold at 3.6% for the full 12 months.
Westpac's chief economist, Luci Ellis, said:
Westpac Economics has revised its outlook for the RBA cash rate to an extended hold for the whole of 2026. While the RBA recognised that some of the recent inflation surprise reflected temporary factors, it has clearly taken signal from it. Inflation is expected to moderate in 2026, but not soon enough to induce the RBA to step back from its current hawkish view of the risks. If our broader set of forecasts are borne out, rate cuts are still feasible in February and May 2027.
Though, Ellis does concede that there are risks that the RBA could both cut rates and increase them this year. She adds:
There are risks on both sides of our base case view. We reserve the option to put rate cuts in 2026 back on the table if the labour market starts to unravel. We think that rate hike talk is premature. We cannot rule out that more near-term bad news on inflation spooks the RBA and induces a near-term hike, but in our view, it is not the most likely outcome. If it does happen, though, our forecasts for growth, the medium-term inflation outlook and the labour market would need to be revised down, and a subsequent reversal of that policy tightening would be in play in 2027.
Overall, it should be a relatively steady year for borrowers if Westpac is on the money with its forecast.
