Australia could be in for two more interest rate hikes if it’s to bring inflation back to manageable levels, according to Westpac’s senior economist Matthew Hassan. Despite inflation dropping to 3.8% by December, recent signs point to continued financial pressure on households. With consumer sentiment slipping and household spending declining, it seems like the Reserve Bank of Australia (RBA) will need to tighten the purse strings even more.
The Current Situation: Rising Costs and Strained Finances
The latest economic report from Westpac highlighted a 2.6% drop in consumer sentiment, following the RBA’s recent interest rate hike. While the decline in sentiment wasn’t as severe as in past hikes, the impact is still notable. Hassan points out that the drop in consumer confidence reflects growing concerns about the financial strain many Australians are facing as they try to balance higher interest rates with the cost of living.
Hassan also pointed out that Australia’s inflation—though lower than it was during the height of the pandemic—still presents a significant problem, reports Sky News. To bring inflation back down to the target range of 2-3%, the RBA will likely need to implement two additional rate hikes. He explained that while inflation has improved somewhat from last year’s highs, it is still stubbornly above the RBA’s target, requiring continued efforts to slow down the economy.
The Impact of Higher Rates
The latest round of rate hikes is already showing its effect. With household spending dropping by 0.4% in December, many are wondering how much more Australians will be able to spend before it hits a tipping point. This is especially concerning as the cost of mortgages continues to rise for homeowners and renters alike. While the overall economy remains strong, the pressure on household finances is undeniable.
However, there’s some silver lining: the consumer sentiment drop of 2.6% is much lower than the usual 3.8% plunge following past rate hikes, suggesting that Australians might be adjusting to the new economic reality. Hassan believes the positive news is that many Australians expected the rate hikes and had time to prepare for them.
What’s Next?
As we look ahead, Westpac’s prediction of two more rate hikes raises the question of how much longer Australians will be able to handle the financial burden. The RBA is in a tricky situation. On the one hand, it needs to curb inflation, but on the other, it risks pushing the economy into a slowdown if rates continue to climb.
The debate around inflation, rates, and consumer confidence will undoubtedly continue to dominate the conversation in 2026. For now, though, Australians will have to brace for a couple more hikes before inflation might truly settle.
