Westpac’s call for a June hold followed by further hikes in August and September keeps the RBA’s tightening cycle alive in market pricing, even as the bank trims its inflation peak forecasts. The framing that downside risks dominate, with zero or one hike more likely than three, suggests markets should treat the August/September calls as conditional rather than locked in, leaving room for AUD and rates volatility around upcoming data.
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Westpac expects the RBA to hold rates steady in June before resuming hikes in August and September, even as it trims its headline inflation peak forecast to 4.7% from 5.0% on lower oil prices.
Summary:
- Westpac expects the RBA to hold the cash rate steady at next week’s meeting, affirming its prior view
- The pause follows three consecutive rate increases, giving the RBA time to weigh weak consumer and housing trends against high inflation and data centre investment
- Westpac lowered its headline inflation peak forecast to 4.7% from 5.0% on a lower oil price track
- Trimmed mean inflation peak was revised down to 3.8% y/y from 4.0% y/y
- Despite the downgrade, Westpac still sees inflation running hotter than the RBA’s own forecasts
- Westpac retains its call for further hikes in August and September
- The bank says risks are skewed toward a smaller cycle, with zero or one further hike more likely than three
Westpac has reaffirmed its expectation that the Reserve Bank of Australia will leave the cash rate unchanged at next week’s meeting, even as the bank revised down its inflation forecasts ahead of its June Market Outlook.
The bank said three consecutive rate increases have given the RBA’s Monetary Policy Board room to assess competing trends, weighing soft consumer and housing data against persistent inflation pressures and a boom in data centre-related investment. A recent mixed run of inflation and labour market data, Westpac said, supports the case for a pause.
On inflation, Westpac lowered its forecast peak for headline CPI to 4.7% from 5.0%, citing a lower expected peak for oil, petrol and diesel prices. The peak for trimmed mean inflation was revised down to 3.8% year-on-year from 4.0%, though the bank noted ongoing pass-through from fuel costs into other prices, alongside a larger-than-expected rise in award wages adding to market services inflation.
Despite the downward revisions, Westpac said its inflation track remains above the RBA’s own forecasts, and if correct, would leave the central bank surprised to the upside. The bank therefore retains its call for further hikes in August and September, consistent with the RBA’s priority of bringing inflation back toward its 2.5% target.
However, Westpac flagged the risks as skewed to the downside for its hike count, saying a more extended pause and a smaller overall tightening cycle, with zero or one further hike rather than three, is more likely than its base case playing out in full.
