The S&P/ASX 200 Index (ASX: XJO) is charging higher on Friday as investors look ahead to next week's Reserve Bank of Australia (RBA) interest rate decision.
At the time of writing, the benchmark index is up 1.93% to 8,800 points.
The market appears confident that the RBA will leave the cash rate unchanged at 4.35% on Tuesday after three increases since February.
But what happens after next week is less clear.
Some economists now believe the rate-hiking cycle is finished and the next move will be a cut. Westpac Banking Corp (ASX: WBC), however, is sticking with its forecast for another two increases.
So, could Australian borrowers really be heading towards lower interest rates?
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Westpac still expects more rate hikes
Westpac Chief Economist Luci Ellis expects the RBA to keep rates unchanged next week before raising the cash rate again at its August and September meetings.
Ellis said inflation and labour market data had been mixed enough to support a pause. However, she believes higher fuel costs, stronger wages, and continued spending on data centres could keep inflation elevated.
Australia's annual inflation rate eased from 4.6% in March to 4.2% in April. However, trimmed mean inflation edged higher from 3.3% to 3.4%, keeping it above the RBA's target range.
Westpac still expects two more rate rises as the RBA tries to bring inflation back under control, despite signs that the economy is slowing.
Other economists see a rate cut coming
National Australia Bank Ltd (ASX: NAB) Chief Economist Sally Auld has dropped her previous forecast for another rate rise in August.
She now believes the next move will be a cut, although she is less certain about when it will happen.
NAB expects the cash rate to fall to 3.6% by the end of 2027 as slower economic growth and tighter financial conditions weigh on housing and credit demand.
HSBC Chief Economist Paul Bloxham has gone further, arguing that the hiking cycle is already over. He expects interest rate cuts to begin during the second half of next year.
The latest employment figures have added some weight to that view. Australia's unemployment rate rose from 4.3% to 4.5% in April, while employment fell by 18,600.
What should investors expect next?
A rate cut still looks unlikely in the near-term while inflation remains above the RBA's target range.
The central bank is expected to leave rates unchanged next week as it waits for more inflation, employment, and wage data.
But the big question is what happens after that, especially if inflation stays high while the economy continues to slow.
