Investors (and borrowers) were celebrating last week after a lower-than-expected consumer price index (CPI) reading appeared to show that rising interest rates had tamed inflation.
This sparked hopes that the Reserve Bank of Australia (RBA) would not have to increase rates any further.
And with the central bank's next cash rate meeting coming next week, what a time for this to happen!
But was the market celebrating too soon? Is it time to put the champagne back on ice?
Unfortunately, the economics team at Westpac Banking Corp (ASX: WBC) thinks it is too soon to be popping the cork out of the bottle Moet.
What is Westpac saying about interest rates?
According to the latest Westpac Weekly economic report, the banking giant believes the RBA will raise interest rates at Tuesday's meeting despite easing inflation.
Westpac's chief economist, Bill Evans, explains:
Markets are convinced that the slowdown in inflation apparent in the June quarter inflation report will see an extension of the Board's July pause. The headline inflation picture has been the key driver of recent decisions in both June and July. But that was not the case in May when the detailed quarterly report allowed for deeper and more reliable insights that were more concerning.
Evans highlights that services inflation has proven to be very sticky and needs to be controlled. He adds:
This time around, the June quarter report highlights the stickiness of services inflation while other information around the labour market and productivity pose questions about whether the staff can credibly lower the inflation profile to allow for an earlier achievement of the inflation target. Most importantly it needs to reach the mid-point of the target range by the extended forecast end-point of December 2025.
In light of this, the chief economist expects the RBA to make one final increase to interest rates next week. He concludes:
If, as we consider likely, the RBA's revised forecasts show little progress in this regard then the Board should take out more 'insurance' with an additional 25bp rate hike at its August meeting. A combination of one last hike in August complemented with the ongoing 'soft' tightening bias seems to be the best approach to a difficult challenge.
Time will tell what happens. But thankfully, we don't have long to wait. The RBA meets on Tuesday and will announce its decision at 2.30pm AEST.
