The Reserve Bank of Australia (RBA) will be holding its latest cash rate meeting next week and the economics team at Westpac Banking Corp (ASX: WBC) are expecting more pain for borrowers.
What is Westpac forecasting?
Last month the RBA elected to raise rates by 0.5%, taking the benchmark cash rate to 0.85%.
According to the latest Westpac Weekly economic report, Australia’s oldest bank expects the RBA to follow up June’s hike with another 0.5% increase next week. This will take the cash rate to 1.35%.
Westpac’s chief economist, Bill Evans, believes the central bank should go hard early. Particularly when rates are still relatively low. Whereas he feels smaller increases will be appropriate in an “uncertain environment.”
We advocated pushing hard on rates at the beginning of the cycle when the risk of overtightening was low.
My interpretation of the “uncertain environment” is that in due course, when rates are higher, that consideration will be relevant. Once policy is near the top of the “neutral zone” [1.5–2.0%] the impact of policy on the economy does become more uncertain and caution is warranted.
It is for this reason that Evans believes a 50 basis points increase next week is almost inevitable.
So, now that the Board has clarified its position on the best approach to policy it would seem quite clear that with the cash rate at only 0.85% a second decisive move of 50 basis points is the appropriate policy.
What about future meetings?
Westpac’s chief economist suspects that a third consecutive 50 basis points hike will be coming at the August meeting if inflation remains high.
Though, Evans isn’t advocating a fourth consecutive hike in September. He would prefer the RBA to sit tight and see what impact other rate increases have before acting again.
Our view is that a better policy would be to raise the cash rate by 50 basis points in August and then pause in September so that the unprecedented cumulation of four consecutive meetings totalling 175 basis points can be assessed. There will be no indication of that strategy in July. We will have to await the August Statement to see whether the pause is favoured by the Board.
All eyes will be on the ASX 200 on Tuesday to see how it deals with the news. Here’s hoping it is better than last time!