VIEW: Bills Evans Comments On RBA

Looks like a note from Westpac Chief Economist Bill Evans has triggered a rally in the front end of the AUD rates space.

• Evans notes that “by assessing the level of rates as being “highly stimulatory” the decision to lift rates by 50 basis points in June was clearly explained. The option of moving in regular 25 basis point moves had the advantage of withdrawing the stimulus in regular steps at a time of considerable uncertainty. If, as we expect, the Board decides to raise the cash by a further 50 basis points in July, the cash rate will still be only 1.35% and still just in the “stimulatory” zone making the “50 in July” a relatively straight forward decision. We expect that neutral is in the range of 1.5%–2.0%. As rates go higher so the case that policy is stimulatory becomes less clear and a shift back to the 25 basis point approach seems preferable, although the “every meeting” model which was discussed at the June Board would need to be reviewed given the higher starting point. Indeed, it is interesting in the Minutes that despite the clear case for moving by 50 basis points the Board concludes that “Given the current inflation pressures in the economy and the still very low level of interest rates, ON BALANCE, (my emphasis), members agreed to a 50 basis point adjustment in the cash rate target.” If there was some serious consideration given to the 25 basis point move in June then a switch back to 25’s from a higher base seems reasonable. Our view is 50 in July; 25 in August; pauses in September/October; 25’s in November; December; February for a peak terminal of 2.35%.”