Westpac: Will RBA Pricing Be Quickly Re-Calibrated?

Westpac note that “for some time, the market has been factoring in a more aggressive RBA hike cycle than forecaster consensus. That remains the case, with market pricing around a 2.25% cash rate by year end versus a median forecast of 1.50%. The latter is also the terminal rate forecast, versus market pricing comfortably above that. There are a number of reasons for this mismatch, not least of which are market fears that the RBA was risking falling behind the curve and thus having to hike more aggressively in the future. Will that fear now be removed, and the terminal rate fall significantly? While we are confident that this re-calibration will eventually occur, it is unlikely while emergency accommodation remains in place and given the backdrop of a 50bp Fed hike. While the RBA’ cash target will be rising at a fast pace through 2022 and early 2023, we do not think it will move above Fed Funds. That has important implications for cross market relativities. As does the fact that relative forward pricing shows around a 40bps gap between our forecast versus those forwards.”