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Westpac downgrades cash rate forecast

by Annie Kane11 minute read

The major bank has downgraded its terminal rate forecast and called a pause in April, following new economic data and RBA rhetoric.

Westpac Group’s chief economist Bill Evans has lowered his expectations for the cash rate peak — suggesting the terminal cash rate in the Reserve Bank of Australia’s (RBA) current tightening cycle will peak at 3.85 per cent (down from his previous forecast of 4.1 per cent).

In an economic update, Mr Evans said that Westpac now expected the central bank to hold the cash rate where it is next month, rather than raising it for the 11th consecutive month.

Instead, he said that he believed the RBA would raise the rate in May 2023 by 25 bps taking the official cash rate to its forecast peak of 3.85 per cent.


Speaking of the decision to revise the forecast, Mr Evans flagged a range of considerations, including RBA governor Philip Lowe’s “about face” from his “surprisingly hawkish response” to the December quarter inflation report, given “disappointing growth print for the December quarter; the slower than expected wages gain in the December quarter; and the 0.4 per cent fall in the monthly inflation index in January”.

Mr Evans highlighted the changed language in the March minutes, which took a more tentative bent than the wording in the previous month and was then eked out further in a speech the following day, where the governor noted that a pause in April would be considered.

Other factors listed by Mr Evans included low business confidence, falling unemployment, and an expectation that the February inflation report (which is released on 29 March) will show another rise.

Mr Evans also flagged the US “credit squeeze” on regional banks which is undermining confidence in the stability of the global banking system (though he suggested Australia was largely insulated from it).

He continued: “Even if the markets settle by the time of the RBA’s April Board meeting there will be sufficient uncertainty for a prudent board that was already clearly open to a pause to take that option.

“For the following board meeting in May the issues will be more clear-cut. The board will have the benefit of refreshed staff forecasts, especially for inflation following the March quarter inflation report (due 26 April) ...

“We do not think that a further pause would be credible in the face of ongoing high inflation and prospects of not returning to the target band until mid-2025.”

Westpac expects a further lift in the cash rate to 3.85 per cent at the May meeting before a pause. It then expects the easing cycle to begin from March 2024.

The remaining big four banks still largely expect the RBA to hike next month.

ANZ economists have maintained their belief that the RBA will hike by 25 bps in both April and May, citing the “robustness” of data released during the past week.

The Commonwealth Bank of Australia (CBA) has suggested that a “hike is still very much in play” for April, though “the financial system issues in the US and Europe this week has complicated their decision“.

The Commonwealth Bank has indicated that it will firm up its predictions for the RBA’s next meeting as developments progress and it sees more of the data flow.

Similarly, NAB economists said that the employment data and labour force survey were “supportive of an April hike from the RBA”.

[Related: RBA ups cash rate for 10th consecutive month]

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