The recent backflip in interest rate expectations is the catalyst for the lowest sentiment recorded among consumers in more than 15 months.
The latest Westpac-Melbourne Institute Consumer Sentiment Index shows about two thirds of those with a view now expect mortgage rates to rise in 2026.
The index factors in how borrowers feel about the short- and medium-term economic outlook, the timing of spending decisions, and how their family finances stack up compared with 12 months ago.
While confidence is higher than during the post-Covid cost of living crisis, Westpac's head of Australian macro-forecasting Matthew Hassan said sentiment had dropped significantly since the last index in September.
For the first time since October 2024, pessimists have outnumbered optimists across every component of the index, with all sub-indexes recording reads below 100.
“The main catalyst continues to be a sharp turn in interest rate expectations,” Mr Hassan said.
Westpac–Melbourne Institute Consumer Sentiment Index, January 2026. Picture: Westpac
Borrowers faced a sharp switch in cash rate forecasts after trimmed mean inflation came in at an all-year high of 3.0% in the Australian Bureau of Statistics' September quarter inflation data.
Headline inflation came in even hotter at 3.2%, meaning both numbers are now back outside the Reserve Bank's all-important 2-3% target range that strongly determines the cash rate path.
The ABS' new monthly series was higher still, with an annualised rate of 3.8% in the 12 months to October, and 3.4% in the 12 months to November.
This led some analysts to believe the next cash rate move from the RBA will be up, and that the August cash rate cut to 3.60% may have been premature.
Speaking after the central bank's December meeting, governor Michele Bullock said the possibility for rate hikes in 2026 had been discussed.
The Westpac index now shows nearly two thirds of consumers now expect mortgage rates to move higher over the next 12 months, more than double the share of those who felt that back in September.
The Westpac–Melbourne Institute Mortgage Rate Expectations Index also rose a further 5% in January.
The index, which tracks consumer expectations for variable mortgage rates over the next 12 months, is now at its highest level in 2.5 years.
“Back then, 68% of consumers expected mortgage rates to rise," Mr Hassan said. "Just over 64% hold the same view today.”
Westpac is not forecasting a change to the cash rate at Reserve Bank’s upcoming meeting on 3 February, anticipating a prolonged 'hold' period lasting the rest of this year.
“Recent strong inflation reads and an upswing in domestic spending have clearly raised concerns that inflation is not yet fully tamed,” Nr Hassan said.
“The RBA monetary policy board is sensitive to this risk and has prepared the ground for possible rate increases, should they be needed.”
It’s hoped a softer labour market will ease demand pressures on goods and services, allowing borrowers to feel the positive effects of cooling inflation later this year.
Reserve Bank governor Michele Bullock is expected to announce another rate hold next month. Picture: News Corp Australia
On the housing front, the index noted house price expectations have cooled in January but remain bullish.
The national home price increased by 0.1% over December to reach a new record high, according to the latest PropTrack Home Price Index.
The median price of a home in Australia is currently $880,000 – $82,200 more than one year ago.
Mr Hassan noted that while sentiment among homebuyers had improved marginally in January it remains “pessimistic overall”.
English (US) · 