VIEW: Westpac’s Evans Now Looks For June Hike

Westpac chief economist Bill Evans notes that “the Reserve Bank Governor surprised us on Tuesday with the Board’s decision to abandon its patient approach to monetary policy. Since the last Board meeting, when “patience” was emphasised, we have seen a further drop in the unemployment rate, from 4.2% to 4.0%, and a continuing surge in job vacancies pointing to further falls in the unemployment rate through the rest of 2022.”

• “Accordingly, we have revised down our forecast for the unemployment rate which is now expected to reach 3.25% by year’s end compared to 3.75% forecast previously. That much tighter labour market in turn points to a stronger lift in wages growth in 2023 with a peak of 4% now expected compared to our previous peak of 3.5%. We also recently revised up our forecasts for the U.S. federal funds rate, which is now expected to peak at 2.375% by end 2022. We expect the RBA has also been raising its own expectations for the federal funds rate in the wake of recent data releases and the strong rhetoric from FOMC members, including Chair Powell.”
• And recall that this shift by the RBA Board, from a ‘patient’ to a more pro-active approach to monetary policy – is in the context of an election campaign that will be fought through most of April and the first half of May.”
• “By establishing a clear expectation that the Board will now begin the tightening cycle in June, the RBA is willing to risk political controversy, particularly around any potential discussion of the role of the federal budget in changing the Board’s stance. Being aware of such complications but still being prepared to change the stance emphasises the Board’s determination to change the policy message.”
• “Now we expect a much shorter tightening cycle with consecutive rate hikes in June (15bp); July (25bp); and August (25bp). That point would see the 2020 COVID emergency cuts unwound with the Board likely to take a pause in September. Further hikes are now expected in October (25bp) and November (25bp) reaching 1.25% by year’s end. The cycle would resume in February 2023 with three more 25bp hikes in February; May and June 2023. We would be surprised if the peak in the RBA cycle was too far out of synchronisation with the FOMC.”