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BILL’S BITES: Inflation outlook to delay cash rate peak

04:00pm November 02 2022

The Reserve Bank of Australia lifted the cash rate by 25 basis points to 2.85 per cent at its November meeting, deciding against a bigger move despite a significant lift in the inflation outlook. 

The Westpac economics team had expected a 50 basis point increase after the September inflation report came in much stronger than expected. 

The report pointed to price pressures over the next six to nine months being more elevated than previously thought, and more broadly distributed. For instance, we now expect underlying inflation to run at 6.4 per cent out to the March quarter, compared to prior expectations of 5 per cent.

The RBA also raised its inflation forecast to 8 per cent this year, from 7.8 per cent. In 2024, the inflation rate is forecast to still be above 3 per cent , making it three years in a row that the central bank expects inflation to run above its 2-3 per cent target band. 

The forecast for 2024 is particularly important because if the RBA is right and they're still not within the band by that point, it's going be very difficult for them to cut rates in the way we've been expecting.

We still believe that rate cuts will happen in 2024, because we think growth and inflation will be lower than the RBA is expecting, but the risk is that those cuts become much more uncertain. Inflation pressures have been accentuated and I don’t believe current policy is taking enough account of that. 

In sticking with a 25bp path it seems that the Board is prepared to await the impact of the series of hikes, at the risk of embedding an inflation psychology in the system which would eventually require a much more damaging policy response.

Despite the RBA not moving by 50 bps, we think the higher inflation profile justifies maintaining our 3.85 per cent terminal rate forecast. We now expect 25 basis point increases to continue at the board meetings in December, February, March, and May.

For the full report, visit WestpacIQ

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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