VIEW: Westpac's Evans On The Prospect Of Rate Hikes

Westpac chief economist Bill Evans notes that "this bond cycle is posing some real headwinds for the RBA's guidance that the overnight cash rate will not move until 2024."

• "In fact, that guidance looks more consistent with an even later timing – namely, the second half of 2024. Current RBA forecasts have the underlying inflation rate hitting 2.25% by end 2023 and moving in 0.25% increments every 6 months, implying that the "lift off" inflation rate will not be apparent until late July with a possible risk that a second print might be required pointing to the first rate hike in November 2024 – about the time we expect the FOMC and the RBA will have reached their peaks."
• "Finally, we know that the RBA respects the policy approach of the Bank of Canada. The BOC has indicated that it will soon enter the reinvestment phase of QE. Even though it will not be adding to the size of its balance sheet it will purchase sufficient bonds to offset maturities in bonds it is already holding. That would see the size of the BOC balance sheet stabilise. The BOC is noncommittal at this stage whether the reinvestment stage would continue through the rate hike period. Shrinking the balance sheet and raising rates are both forms of policy tightening. The FOMC's experience was that the impact of rate hikes was well understood whereas shrinking the balance sheet was unknown territory."
• "If we are right, the first rate hike in Australia will come just before the need for reinvestment given that the first stage of the RBA's QE was to purchase 3 year bonds in the early stages of the Yield Curve Control policy in 2020 However, if RBA's forecasts are correct and the first hike is not till as late as November 2024, we will see a reinvestment phase in the current QE process in 2023 and 2024. Under such a scenario, we would expect the RBA to fully invest maturing bonds – thereby keeping the size of the balance sheet stable."