Westpac - High Bar For Further Rate Hikes

Westpac Chief Economist Luci Ellis (an ex senior RBA official) weighs in on the local interest rate outlook for Australia. The bar high for another interest rate hike she states, even if the Q2 inflation print is ugly. See below for more details.

Westpac: "Recent inflation data overseas has reminded market participants that sticky inflation need not imply stuck inflation. After a few wobbles, disinflation has resumed in the United States, Canada and New Zealand.

Expectations of near-term cuts in policy rates have therefore come back into frame in the United States and New Zealand; the Bank of Canada has already started cutting, as have the ECB and several other European central banks. Our Chief Economist in New Zealand, Kelly Eckhold, has changed his rate call and now expects the RBNZ to start cutting from November.

There is no reason for the RBA to move in lockstep with its peers. At times, the RBA and the Fed have even moved in opposite directions. But there are limits to divergence. To be fair, Australia was later to open up and experience the inflation surge. The RBA has also chosen a ‘not quite as high for longer’ strategy and a more gradual return of inflation to target. Even allowing for this, though, Australia should be expected to follow the same broad disinflation trend as its peers, in the face of mostly common shocks.

As we have previously noted, an unexpectedly ugly June quarter CPI result might make the RBA want to wait even longer. But would it be enough to convince it that Australia is on a completely different path to its peers?"