Westpac joins peers in revising cash rate outlook

Westpac has updated its monetary policy expectations, with chief economist Bill Evans projecting a terminal rate of 4.1%, up from 3.85%.

However, the speed in which the cash rate gets to its peak remained unchanged, with Westpac pricing in a cumulative 75bs in hikes by May.  

“We still see the date of the peak as May 2023 but now see that peak as slightly higher,” Evans said. 

“The previous view envisaged a 25bps hike in March followed by a pause in April with the final hike of 25 basis points in May.”

According to Evans, the updated guidance is a reflection of the Reserve Bank of Australia’s (RBA) “hawkish” outlook. 

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“Over the course of the last few months of 2022 the board consistently referred to the possibility of pausing and, as recently as December, considered a pause as one of three policy options,” he said. 

“However, the board has adopted a more hawkish approach since the release of the December quarter inflation report.”

He stated the RBA’s hawkish outlook came off the back of stronger than anticipated inflation figures over the December quarter, with annualised underlying inflation of 6.9 per cent — above market forecasts of 6.5 per cent. 

In the February minutes of the RBA’s monetary policy board meeting, members conceded “further increases in interest rates are likely to be needed over the months ahead”. 

Evans added the board “did not even consider a pause”. 

Westpac joins ANZ and NAB in projecting a terminal cash rate of 4.1%.

ANZ, which also lifted its peak from 3.85%, said the nine consecutive hikes to cash rate since May 2022 were yet to curb demand-side inflationary pressures.  

“Nearly 70% of mortgage debt has already been impacted by higher variable rates, and to date there is little evidence of a material impact on overall spending,” ANZ Research noted. 

“Persistence in inflation pressures suggests that the cash rate will remain in restrictive territory for some time.”

ANZ projected three consecutive 25bps hikes in March, April and May.

The Commonwealth Bank would be the only big four bank to hold fast to its dovish outlook.

Ahead of the RBA’s February meeting, it predicted one final hike to the cash rate ahead of a monetary policy pause. 

Accordingly, the current cash rate of 3.35% would be CBA’s terminal rate. 

Westpac’s revised monetary policy outlook also included a revision to its projection for the US federal funds rate. 

Westpac’s Evans expected the funds rate to hit a peak of 5.25-5.5%, up from 4.75-5%.

Despite previously signalling a slowdown in monetary policy tightening off the back of swifter than expected progress towards its inflation target, the Fed foreshadowed additional hikes over the coming months.   

“Members anticipated that ongoing increases in the target range would be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the central bank February minutes noted. 

The Fed reiterated that future monetary policy decisions would involve considerations of the impact of cumulative tightening, as well as the lag impact of previous hikes to the funds rate. 

“Members agreed that, in assessing the appropriate stance of monetary policy, they would continue to monitor the implications of incoming information for the economic outlook.” the FOMC minutes read. 

“They would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals."