The Reserve Bank of Australia board lifted the cash rate by 0.25 per cent at its December meeting this week, as expected by the Westpac economics team.
That means we've seen rates lift every meeting since May, from 0.1 per cent up to 3.1 per cent now.
And although markets have been confident the Governor would soften his guidance, with a weaker tightening bias, he maintained the guidance he’s given in the last two meetings, stating that “The Board expects to increase rates further in the period ahead”.
The next meeting of the RBA is not until February 6, giving the board ample time to assess the cumulative impact of the rate increases from the perspective of household spending, the housing market, employment, inflation, the global economy and wage inflation.
While there were few changes in the board’s December statement from the previous month, one that stood out was the Governor’s emphasis on the dangers associated with high inflation, in contrast to previous statements which arguably downplayed the potential economic damage.
This new emphasis, which is consistent with the views of other central banks such as the Federal Reserve, was further underscored when the Governor noted, “The Board’s priority is to establish low inflation and return inflation to the 2-3 per cent range over time”.
Overall, our view is that the RBA has correctly maintained a strong tightening bias while emphasising the uncertainties in the outlook, and the inflation report for the December quarter will likely signal the need for further tightening.
We expect the Board will act on this, with 25 basis point increases in each of February and March, and a further increase in May, to achieve the Board’s clearly stated objective “to re-establish low inflation”.
We are surprised that market pricing still includes a likelihood of rate hikes in the second half of 2023. Our forecast of 1 per cent growth in 2023 implies that the economic slowdown will be particularly intense in the second half, recluding the need to tighten further.
This means that, if inflation gets down to levels that are acceptable to the RBA, we believe rates can be cut in 2024.
For full analysis, visit Westpac IQ.