Westpac: Hawkish Fed To Keep RBA Forward Cash Curve Steep

Westpac note that “while the 2022 RBA profile hasn’t changed much over the past week, the market has pushed the profile for 2023 and beyond even higher. The implied cash rate is nearly 150bp higher than Westpac’s forecast by August 2023 and the terminal rate just under 100bp higher. Even so, pricing reflects the market’s fear around the RBA’s “patience” and the associated risk that they may need to tighten policy by even more than the Fed as a result. That is unlikely to change anytime soon. Indeed, the current forward profile is likely to remain at least until April’s Q1 CPI release allows a re-assessment. Beyond that, we will only be able to make a more confident assessment of both the pace and size of the RBA’s own tightening cycle once they deliver their initial hike. We continue to expect that to occur in August, although the market debate is more focused on how quickly the RBA could adopt a different path than they are currently articulating. Historically they have pivoted quickly, but we question whether there will there be enough in the next CPI release to allow messaging in May for a June hike. We think their focus on wages and labour costs will still not allow a faster timetable for rate hikes.”