Pre-September rate cuts ‘unlikely’: Westpac

Westpac chief economist Luci Ellis has outlined the major bank’s reasoning behind why they believe that rate cuts are expected to occur after the late-September monetary policy meeting and why it’s unlikely that the central bank will move before this date.

Ms Ellis noted that the current expectation of a September rate cut is predicated on the basis that “things will turn out broadly” as the major bank and the RBA expect.

“Inflation continues to decline, while growth remains soft in the first half of the year but does not fall away completely. Unemployment drifts up but does not rise precipitously,” she said.

Secondly, Ms Ellis stated that the major bank takes it as given that the current stance of monetary policy is restrictive, which aligns with the RBA’s view (and supported by various indicators) including credit growth and the drag from interest payments on household income.

“If the RBA maintained restrictive policy on an ongoing basis, growth would slow so much that inflation would undershoot the RBA target and keep falling,” Ms Ellis stated.

“The decision to reduce the restrictive stance of policy – and eventually normalise to a more neutral stance – is therefore a question of when, not if.”

The third reason, as previously outlined by RBA governor Michele Bullock, is that the RBA will not necessarily wait until inflation reaches its target range of 2–3 per cent before the next move in the cash rate.

Ms Ellis continued: “In thinking about the risks around this view on timing, the different sources of risk are pulling in opposite directions.

“The risks relating to the data would, if realised, tend to pull the date of the first rate cut forward. Over the past few months, the data have tended to be softer than the RBA expected back in November. Further surprises in this direction would start to shift the inflation outlook lower.

“A date much sooner than September seems unlikely, however, because of the countervailing risk from the Board’s decision making and perception of policy risk, these are considerations that would tend to push the date later.”

In summation, Ms Ellis stated the RBA is “far from being in a hurry” to lower the cash rate, and want to avoid the risk of delaying the return of inflation to target.

Westpac expects the RBA to cut interest rates twice in 2024, in both September and November, for a total of 50 bps.

[RELATED: Rate cuts may come sooner than expected: Bullock]