Westpac Economics team believes the Reserve Bank of Australia will follow up Tuesday’s 25 basis point rate hike with a 40 basis point increase in June, bringing the cash rate back to its pre-Covid level at 0.75 percent, after the central bank sharply revised up its inflation forecast.
Back in February the RBA was talking about an underlying inflation rate in 2022 of 2.75 percent. They're now forecasting 4.75 percent, a two percentage point increase in the outlook.
This explains why the Board surprised by lifting the cash rate a little further than the 15 basis points expected by the market and many analysts including Westpac.
It also signals that the Board should be prepared to “front load” its tightening cycle to convince households and business that it is committed to returning inflation back to its 2-3 percent target band.
That will, of course, mean a series of rate increases. Unwinding the emergency rate cuts we saw over the pandemic is likely to happen very quickly. After June, we expect a series of 0.25 basis point hikes, taking the cash rate up to 1.75 percent by the end of this year and peaking at 2.25 percent by the middle of 2023.