Westpac: The Market Will Maintain A Degree Of Front-Loading For RBA Policy

Westpac note that “it is well known that a number of markets have responded to the historical levels of inflation by factoring in an aggressive and “front-loaded” tightening cycle. RBA and Fed pricing are no exceptions, with the market factoring terminal rates of a round 3.25% for both central banks in 2023. That is at the upper end of the hawkish range for most forecasters but reflects the uncertainties and risks around inflation expectations as a result of these unusual global and domestic circumstances. The peak in the RBA pricing is ~100bp higher than Westpac’s forecast terminal rate, while the peak in the Fed’s is ~37.5bp above our terminal expectations. That suggests that there might be scope for a bullish correction to the RBA policy profile at some stage. But when? In our view, the RBA should deliver a 40bp hike in June. The market is only aspiring a 20% chance of that occurring. That is consistent with the RBA’s “BAU” messaging and confidence they have more meetings to get the settings right than other central banks. However, if they were to deliver the larger hike earlier, then we expect that would be a significant signal and remove some of the pricing for higher than 25bp hikes in the meetings beyond that. There is around a 40bp hike factored-in to October and between 25-40bp for each meeting in 2022. For most meetings, that is at the lower end of recent expectations, where we think they will stay for now and even beyond the June meeting if the RBA decides to deliver a 25bp hike.”