VIEW: Westpac’s Evans Lifts Terminal Rate Call To 4.10%

Westpac chief economist Bill Evans writes “we have lifted our forecast terminal RBA cash rate from 3.85% to 4.10%.”

• “We have also lifted our forecast for the federal funds rate with a peak in June of 5.25-5.5%, from 4.75–5% in March.”
• “Since October we have consistently held the view that the cash rate would peak in May at 3.85%.”
• “We still see the date of the peak as May 2023 but now see that peak as slightly higher.”
• “The previous view envisaged a 25 basis point hike in March followed by a pause in April with the final hike of 25 basis points in May.”
• “Over the course of the last few months of 2022 the Board consistently referred to the possibility of pausing and, as recently as December, considered a pause as one of three policy options.”
• “The RBA seems locked in to further hikes in the cash rate in both March and April. The revised forecasts and March quarter inflation report are likely to require a further hike in May.”
• “With the concerns about a wage-price spiral easing following the December quarter Wage Price Index report; demand slowing; and the cash rate deeply contractionary, at 4.1%, the case for a pause in June is credible.”
• “Further out the next move is likely to be a rate cut beginning in the March quarter 2024.”
• “But risks to this scenario are to the upside – COVID legacy factors that could boost demand and slow the disinflation process; the extension of the US tightening cycle; and recent recognition that Australia’s cash rate is below other countries will keep markets alert to those upside rate risks.”