Westpac has revised its outlook for interest rates with a much shorter tightening cycle now expected in light of the Reserve Bank’s (RBA) latest rate decision.
According to Westpac’s updated forecasts, three consecutive rate hikes will take place in June, July and August, bringing the cash rate to 0.75 per.
Two further hikes are then expected to take place in October and November with the cash rate expected to sit at 1.25 per cent at the end of the year.
“The Reserve Bank governor surprised us on Tuesday with the board’s decision to abandon its patient approach to monetary policy,” said Westpac chief economist Bill Evans.
“Since the last board meeting, when ‘patience’ was emphasised, we have seen a further drop in the unemployment rate, from 4.2 per cent to 4.0 per cent, and a continuing surge in job vacancies pointing to further falls in the unemployment rate through the rest of 2022.”
Westpac now expects that unemployment will reach 3.25 per cent by the end of 2022, down from its previous forecast of 3.75 per cent.
Looking to next year, the bank predicted that the RBA would lift interest rates by 25 basis points three more times in February, May and June.
This would bring the cash rate to 2.00 per cent, higher than the 1.75 per cent terminal rate that was previously forecasted by Westpac.
“The three hikes in 2023 will be in the context of accelerating wage pressures with the annual rate reaching 4 per cent by mid-2023,” predicted Mr Evans.
“Our previous profile for 2022 had hikes in August, October and December in 2022, but the changed labour market situation and what looks to be a more urgent approach from the board signals an earlier beginning to the cycle and only one ‘break’ in the sequence to mark the unwinding of emergency cuts.”
Mr Evans also explained that the RBA’s shift from a patient to a more proactive approach to monetary policy was notably in the context of the upcoming election.
“By establishing a clear expectation that the board will now begin the tightening cycle in June, the RBA is willing to risk political controversy, particularly around any potential discussion of the role of the federal budget in changing the board’s stance,” he said.
“Being aware of such complications but still being prepared to change the stance emphasises the board’s determination to change the policy message.”
