VIEW: Westpac: Budget Does Not Make Case For RBA To Drop “Patient” Approach

Westpac chief economist Bill Evans notes that “the Treasurer has delivered a responsible Budget getting the balance right between short term stimulus and fiscal repair. The modest short term stimulus does not justify the case for the RBA Board dropping its current patient stance since the Budget stimulus is dwarfed by issues concerning household savings when assessing demand pressures in the economy.”

• “The government’s Budget forecasts which point to inflation moving back within the 2–3% target band in 2023/24 appear consistent with the RBA’s own approach. Indeed the June quarter Inflation Report which will print on July 27 is likely to show an actual reduction in annual inflation of around 0.5% as a result of the lower petrol prices. While financial markets remain convinced that the RBA will start lifting rates as early as the May meeting we remain comfortable with our own view that the patient approach from the RBA will see the first increase in August with a target terminal peak of 1.75% by end 2023. This compares with current market expectations of an extraordinary peak of around 3.5% in 2024.”
• “Even skittish markets will struggle to see anything in the Budget that would encourage the prospect of higher rates. In that regard the Reserve Bank Board meets next week on April 5. With markets expecting a rate hike at every meeting from June along with a 40% chance of one in May the wording of the Governor’s Statement following the Board meeting will be watched very closely.”
• “If, as we expect, the Governor retains “patient” then it will be a tough call for the market to maintain that the June rate hike is a certainty.”