Westpac’s chief economist, Luci Ellis, has confirmed the major bank’s rate cut forecast has been moved forward, now expecting a rate cut in July rather than August.
This shift comes off the back of the latest May monthly consumer price index (CPI) figures released by the Australian Bureau of Statistics (ABS) on Wednesday, which showed a monthly increase of 2.1 per cent, lower than market consensus of 2.3 per cent, marking the lowest reading since October 2024.
Major bank counterpart, the Commonwealth Bank of Australia (CBA), also shifted its base case to expect a 25 basis point cut in July, aligning with other economists and market commentators.
Much like CBA’s senior economist, Belinda Allen, stating that the call for a rate cut in July will be a “close one”, Ellis also seems unconvinced that the Reserve Bank will definitely lower the cash rate.
“Yes, the May monthly CPI indicator came in below even the low number that we expected,” Ellis said. “That helps bring forward inflation’s return to the 2.5 per cent target midpoint and keep it there, which is what the RBA is trying to achieve.”
“But the June quarterly inflation numbers are still likely to print on the high side, so some caution on the inflation outlook is likely and warranted.”
Ellis noted RBA governor Michele Bullock’s wariness towards the monthly CPI indicator back in May – particularly its month-to-month volatility – while stating that a single month’s data usually “wouldn’t – and shouldn’t” determine the central bank’s decision making.
On Bullock’s comments during the last post-meeting conference, Ellis said this was “an explicit steer that the RBA’s thinking in May was that it did not plan to do back-to-back cuts but would wait for the quarterly CPI ahead of its August meeting”.
“And they still might do that, but it is harder to justify now,” Ellis added.
Ellis further suggested that if the RBA moves quicker than the “cautious and predictable” path it previously indicated, it would imply that the central bank’s forecasts would necessitate changing.
The RBA’s May projections of steady 2.6 per cent core inflation were more about signalling ongoing concerns rather than realistic modelling, particularly over tight labour markets and weak productivity.
“Last week’s labour force and today’s job vacancies data would have reinforced this view,” Ellis said.
“Neither is the RBA planning to bring monetary policy to an expansionary stance – this point was also explicitly mentioned in the minutes.”
Despite recent data reinforcing their concerns, Ellis believes inflation trends will eventually outweigh the RBA’s current domestic-tightness narrative. However, a sudden change in stance would be uncharacteristic of the RBA, which usually shifts views gradually.
In essence, Ellis expects the RBA to continue cutting rates soon, not due to a dramatic change in outlook, but because it was likely already leaning that way and sees little reason to delay further.
Westpac still expects three further rate cuts after July for a terminal cash rate of 2.85 per cent, however, Ellis noted “the timing will depend on the RBA’s post-meeting tone”.
