As a result of an expected “substantial” lift in annual underlying inflation for the March quarter to 3.4 per cent and a fall in the employment rate to 3.8 per cent in April, the big four bank now believes the Reserve Bank (RBA) will decide to lift the cash rate by 40 bps at its board meeting in June.
On Thursday, Westpac released its forecast for the March quarter CPI, lifting its expectations for underlying inflation in the three month period from 0.9 per cent to 1.2 per cent.
If Westpac’s forecast is realised, the quarterly rise in core inflation will be the largest since the mining boom of 2008 as a direct result of broad spread price pressures. Meanwhile, the six-month annualised rate of core inflation is expected to accelerate from 3.5 per cent to 4.4 per cent.
“It is now generally accepted that the RBA will begin the tightening cycle on 7 June,” said Bill Evans, chief economist at Westpac.
“Because the current cash rate is an unusual 10 basis points we had expected that the first move would be 15 basis points to restore the cash rate to 25 basis points.
“However, given our expectations of a rapid further increase in underlying inflation and a forecast fall in the unemployment rate for April to a 48-year low of 3.8 per cent, we expect the board will decide on a bolder initial lift in the cash rate,” Mr Evans said.
But Mr Evans acknowledged the possibility that the board could be concerned about such a large move at the beginning of the cycle with implications for confidence.
“A possibility might be for a more cautious 25 basis point lift in June to be followed by the 40 basis point move in July,” he explained.
“However, we anticipate that market and media expectations will shift towards a 40-basis point move over the next six weeks and the anticipated shock to confidence will be contained,” Mr Evans continued.
This decision is expected to be in the context of the Federal Reserve Open Market Committee (FOMC) having lifted the federal funds rate by 50 basis points on 4 May and the certain prospect of a further 50-basis point increase at the June FOMC meeting which is scheduled for the week after the RBA’s June Board meeting.
Both the Bank of Canada (13 April) and the Reserve Bank of New Zealand (13 April) have recently opted for 50 basis point increases in their policy rates.
