Here's what Westpac says the RBA will do with interest rates next week

Is inflation too hot for the Reserve Bank to handle?

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Animation of a man measuring a percentage sign, symbolising rising interest rates.

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Interest rates are going to be a hot topic again next week. That's because the Reserve Bank of Australia is holding its cash rate meeting on Tuesday. A hotter-than-expected inflation reading has led many to believe that the central bank will be forced to increase rates after pausing for several months.

At present, the market is sitting on the fence with this meeting, with the latest cash rate futures pricing in a 50% chance of a 25 basis points hike to 4.35% on Tuesday.

Whatever does happen, the market is only half prepared for it. So, expect some movement from the ASX 200 index when the announcement drops.

What's going to happen with interest rates next week?

As recently as last month, Bill Evans made his last interest rate call as Westpac Banking Corp (ASX: WBC) chief economist and stated his belief that interest rates have peaked and will start to fall next year. Is that still the case?

Unfortunately, for borrowers, the bank's new chief economist, Luci Ellis, isn't so sure that Evans' forecasts will prove accurate. She explains:

Last week we noted that the RBA would leave rates unchanged so long as they saw inflation coming down as they had expected. But if the data flow showed inflation declining slower than that, they would raise rates. This message was reinforced in the Governor's first speech, on Tuesday, where she said "The Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation."

The September quarter CPI release was always going to be crucial. Has the RBA seen enough to move? At 1.2% in the quarter, both headline and trimmed mean inflation was a little higher than the Westpac team expected.

While this might not seem like enough to cause a rate hike, Ellis believes it will be. She concludes:

We assessed that it would take a significant upside surprise to induce the RBA Board to raise rates at the November meeting. A 0.1% difference might not seem like a lot, but the underlying detail was sobering. So yes, I've seen enough to make my first-ever rate call to be a prediction of a hike.

One positive is that Ellis still expects rates to start to fall from next year and in 2025. She has pencilled in the following for interest rates:

  • 4.1% in September 2024
  • 3.85% in December 2024
  • 3.6% in March 2025
  • 3.35% in June 2025

We will see if Westpac's chief economist's first-ever rate call is on the money on Tuesday.

Motley Fool contributor James Mickleboro has positions in 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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