Westpac: Has The RBA Terminal Rate Shifted Lower For Good?

Westpac note that “the market continues to factor-in a more aggressive tightening cycle. However, when we look at the evolution of market pricing we can observe that there has been a rapid shift lower in RBA expectations over the past week, with around 50bp taken out of the 2023 profile. While the cash profile still remains higher than a month ago, before the RBA hiked 50bp, that is a substantial turnaround. The question is whether it reflects a permanent shift lower, which is something that we have been waiting for, or whether it was more a reflection of a position squeeze which would open up the prospects of shorts being reset at some stage. To some extent the price action merely followed similar moves in fed funds expectations, however we suspect that the fears around the medium term growth profile will be a persistent influence on sentiment moving forward, suggesting we have seen the highest levels for the terminal rate in 2023. Even so, there is still a substantial difference between our forecasts and these cash rate forward profile. We would not expect that to completely reprice until we are much further into the tightening cycle.”