The Reserve Bank of Australia (RBA) could potentially pause the hike trend in April before making the final increase in May, according to the projections of Westpac economists.
Under Westpac’s projections, the cash rate will end up at 3.85% in May and would remain at that level before the RBA started easing by March 2024.
Westpac chief economist Bill Evans said the RBA seemed to have had an “about-face” following the March board meeting, with the Governor responding to the “disappointing” growth print for the December quarter, the slower-than-expected wage gain, and the 0.4% fall in monthly inflation index in January.
“The tentative signal in March was much changed from the confident signal in February,” he said.
“Following a speech the next day of the rate hike announcement, the Governor noted that a pause in April would be considered in the light of the data flow out to the Board meeting on April 4 – specifically: the business surveys; the February employment report; the February retail sales report; and the monthly inflation indicator report for February.”
The NAB business survey showed a sharp fall in business confidence, despite conditions still holding at above average levels.
Meanwhile, the employment report for February was relatively strong — employment increased 64,600 jobs while unemployment fell from 3.7% to 3.5%.
“This report is significant as it means the view that unemployment had bottomed out and was starting to trend higher now requires more information to be confirmed,” Mr Evans said.
“In terms of the Governor’s check-list, confirming a sustained shift towards easing labour market conditions would be a particularly encouraging sign that domestic wage-driven price pressures were likely to remain contained.”
What’s left, however, is the inflation indicator. Mr Evans said it is likely to increase again by 0.6% in February.
“The Board will have the benefit of refreshed staff forecasts, especially for inflation following the March quarter inflation report,” he said.
“We expect the March quarter report will show core inflation still running at 6.7%yr, down only slightly from 6.9%yr and that the RBA’s updated forecasts will show no marked improvement in the inflation outlook.”
For context, the RBA’s current forecast points to headline inflation still holding at 4.8% by the end of 2023. The target band is between 2% and 3%.
Mr Evans said the 25bps lift in May would mean that by the time of the June meeting, any further tightening would appropriately be delayed until the next quarterly inflation report, which will be in August.
“We expect that by August the case for pushing the cash rate even further into contractionary territory will be weak as the economic slowdown becomes more entrenched and as we start to see real progress in lowering inflation, especially if global credit issues continue to impact growth and markets,” he said.
Westpac’s revised forecast was also due to the adverse developments in global markets, particularly in the US economy.
“The most realistic risk scenario for the US economy involves a credit squeeze from regional banks,” Mr Evans said.
“As markets, regulators and rating agencies restrict the capacity of these smaller banks to support SMEs and small business, a new drag will emerge for the US economy. This is also likely to undermine confidence and raise some questions about the stability of the global banking system.”
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Collections: Mortgage News Interest Rates
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