Westpac flips as majors line up behind rate rise call

Westpac’s chief economist Luci Ellis said on Tuesday (8 September) that the bank had previously cautioned that a further increase could not be ruled out, but added that the balance of risks had shifted decisively enough for a November move to become its central scenario.

“The likelihood of an additional rate hike has risen enough to make a November hike (+25bp to 4.6 per cent) the base case again. When we last changed our view on RBA policy, we emphasised that risks of further hikes should not be ruled out,” Ellis said.

“We also said that it was prudent to continue pricing in some chance of a November hike. The data flow and narrative have since changed direction and shifted that probability higher again.”

Household resilience changes the equation

In explaining the forecast revision, Ellis said Westpac had become more concerned that economic demand would remain stronger than anticipated, making it harder for inflation to moderate sustainably.

“The main reasons for the shift are the growing evidence of a more resilient household sector, and a larger-than-expected impetus from the spillovers from the data centre boom,” Ellis said.

“National accounts and internal data have pointed to stronger household incomes in Q2 and onwards, which means spending will be more resilient over the near term even with sentiment stuck at historically weak levels.”

Westpac expects the RBA’s Monetary Policy Board to favour waiting until November rather than responding at its September meeting.

“Tactically, we believe RBA leadership would strongly favour a November hike over September,” Ellis said.

“Overreacting to a noisy monthly print is something they have previously said they would not do. That said, if the internal members felt the situation was more urgent and wanted to get the hike done in September, we believe they could muster a majority of Monetary Policy Board (MPB) votes in favour.

“Either way, the September decision may see a split vote, with some members coming into the meeting with different views about supply capacity and the state of the labour market.”

Yet Westpac said that a September increase remained possible, but added that it believed a delay was more likely while policymakers wait for a broader set of economic data.

“On balance, we do not think a September hike this is the most likely outcome and expect the MPB to prefer to wait for the full quarterly inflation data and revised forecasts to confirm the need for a rate increase,” Ellis said.

The bank has not changed its longer-term expectation for the easing cycle, continuing to pencil in three 25-bp cuts from August 2027.

Majors converge on further tightening

Westpac’s turnaround follows similar revisions by the National Australia Bank (NAB), the Commonwealth Bank of Australia (CBA), and Australia and New Zealand Banking Group (ANZ), all of which have stepped away from earlier expectations that the RBA would keep the cash rate unchanged for an extended period.

NAB is forecasting a 25-bp rise at the RBA’s 28–29 September meeting after July inflation data came in stronger than expected.

While headline CPI continued to ease, NAB said underlying price pressures had not softened sufficiently.

“July CPI data showed inflation running hotter than the RBA expected in early August, and the RBA has repeatedly signalled in recent weeks that the Monetary Policy Board would act if upside risks to inflation were realised,” NAB said.

NAB’s central case remains one September increase, although it has also retained a November follow-up as a risk should activity remain firm.

CBA and ANZ have also replaced their extended-hold forecasts, with both now identifying November as the most likely timing for a further increase.

[Related: NAB predicts September hike in major forecast overhaul]