Westpac: Receive Feb '23 RBA OIS

Pricing is fluctuating between 2 and 3 rate hikes and a 1% cash rate by the end of 2022. That is far more aggressive than Westpac's view for an initial hike to be delivered in early 2023. While we think that the RBA will drop its 2024 guidance following Tuesday's Board meeting, and therefore see no further need for their yield curve targeting policy, we do not think that they will fully endorse current pricing either. So, we would recommend receiving Feb 2023 OIS at current levels. The current pricing reflects the upper end of the forecast community's expectations and is very far from the median expectation. Further, we see the neutral rate as being around 1.25%, rather than having a "2-handle" and expect that that will be where the RBA pauses in this cycle. It is rare ahead of tightening for the market to factor in more than 3 rate hikes over the next 12 months, especially if the actual delivery of the rate hike is not imminent. Hence, we see pricing as overdone for now, and the RBA, while conceding some ground will articulate a similar view or at least imply it through their forecasts."

• Westpac recommend receiving Feb '23 RBA OIS at 1.25%, with a target of 1.00% and a stop at 1.35%.