VIEW: Westpac: Contrary To Widespread Exp. Board Retains Strong Tightening Bias

Westpac note that “the Board has correctly maintained a strong tightening bias while emphasising the uncertainties in the outlook.”

• “There is a stronger recognition of the dangers around high inflation than we have seen in previous Statements when 25 basis point moves needed to be justified.”
• “Westpac expects that the inflation report for the December quarter will signal the need for further tightening and the Board will act on its tightening bias with a 25 basis point increase in February.”
• “Beyond February we expect further increases in March, in response to the December Wages Report, and May to achieve the clearly stated objective of “Board’s priority is to re-establish low inflation.””
• “We are surprised that market pricing still includes some likelihood of rate hikes in the second half of 2023. Our forecast of 1% growth in 2023, partly contingent on our view on the Bank’s tightening cycle and the difficulties in wringing inflation out of the system, implies that the economic slowdown will be particularly intense in the second half precluding the need to tighten further.”
• “The risk, which seems lessened following today’s decision and statement would be that insufficient policy tightening allows elevated inflationary expectations to become embedded in the Australian psyche.”