What is the outlook for interest rates in Australia? Here’s what Westpac thinks

When are rates going to rise?

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red percentage sign with man looking up which represents high interest rates

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Later today, the Reserve Bank of Australia will meet to discuss the cash rate.

Unfortunately for savers and income investors, no action is expected to be taken at this meeting. In fact, many economists believe there will still be some time to wait until the cash rate moves from the record low of 0.1%.

What is the outlook for interest rates?

According to the latest economics report from Westpac Banking Corp (ASX: WBC), its team continue to believe that the central bank will keep rates on hold until early in 2023. It is only at this point that the bank feels the two main drivers of rate increases – inflation and wage growth – will be at levels that support a rate hike.

Westpac’s Chief Economist, Bill Evans, commented: “We expect the RBA to begin raising the cash rate in February 2023. That will be in response to rising inflation (core inflation reaches 2.8% by end 2022) and increasing wage pressures (wages growth to 2.8% by year’s end).”

Mr Evans expects this to be underpinned by strong demand and constrained supply setting the scene for rising prices.

After which, by the end of 2023, Australia’s oldest bank believes the Reserve Bank will have lifted the cash rate to 0.75%.

What about house prices?

Westpac appears to expect house prices to pull back as the outlook for rate hikes improves.

“Those interest rate increases will be coincident with falling house prices. However, just as we have not factored in a significant positive wealth effect in 2022 given the ample income and savings boost to demand, we would expect the fall in prices to impact confidence and future activity although household spending will hold up, particularly in the first half of 2023,” Evans said.

What should you watch for at today meeting?

As for today’s meeting, Westpac suggests investors keep an eye on the central bank’s wording.

It commented: “The RBA is expected to keep policy settings unchanged at its last meeting of 2021. As such, the focus will again be on the wording of the Governor’s decision statement, particularly any assessments of the latest round of economic data, including the Q3 national accounts, and the shifting external environment, particularly with respect to price inflation in developed economies.”

“Westpac remains comfortable with our view that the bank’s first move will come in February 2023 although markets are anxious for a mid-2022 move while the Governor himself is still open to waiting till 2024,” it concluded.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking Corporation. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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