- Westpac now tipping May rate cut
Westpac is now expecting the Reserve Bank to cut interest rates in May rather than February.
Chief economist Luci Ellis, a former RBA assistant governor, made the call about relief being delayed until after Easter on Thursday morning – a week after NAB adjusted its forecasts.
‘An earlier start in February or March is still possible, but it is no longer more likely than a May start date,’ she said.
‘A later start date is also a risk scenario, if inflation does not decline as the RBA is currently forecasting, let alone our own marginally more dovish expectation.’
The 30-day interbank futures market isn’t expecting the Reserve Bank to cut rates until June next year.
Dr Ellis said the minutes of the Reserve Bank’s November meeting, released this week, suggested the RBA was more concerned about inflation rising again, following the expiry of $300 electricity rebates.
‘This is almost certainly how the board and staff are thinking about the outlook,’ she said. ‘It suggests that they will wait for longer than we previously believed.’
The November meeting minutes said the RBA ‘would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable’.
Westpac is now expecting the Reserve Bank to cut interest rates in May rather than February
Headline inflation fell to a three-year low of 2.8 per cent in September but the RBA is expecting the annual consumer price index to surge back to 3.7 per cent by the end of 2025 after the government’s energy rebates expire.
Underlying inflation of 3.5 per cent is still higher than the Reserve Bank’s 2 to 3 per cent target and services inflation is even higher at 4.6 per cent.
The Commonwealth Bank and ANZ are still expecting a February rate cut, with NAB and now Westpac forecasting relief in May.
The major banks have changed their view after RBA Governor Michele Bullock ruled out any relief in 2024.
This means Australian borrowers are missing out even though rates have this year been cut in the U.S., UK, Canada, New Zealand and the European Union.
The Reserve Bank’s 13 increases in 2022 and 2023 took the cash rate to a 12-year high of 4.35 per cent.
The futures market is now only expecting rate cuts in June and December next year.
But Westpac is expecting four rate cuts in 2025, in quick succession from May, that would take the cash rate back to 3.35 per cent for the first time since March 2023.
Chief economist Luci Ellis, a former RBA assistant governor, made the call about relief being delayed until after Easter on Thursday morning – a week after NAB adjusted its forecasts. She is pictured left with her former boss Philip Lowe
‘Similar to the pattern in some peer economies, we expect the initial moves to be somewhat front-loaded, with consecutive cuts in late May and early July,’ Dr Ellis said.
‘This is also a change from our previous expectation of a moderate pace of decline of one cut per quarter.’
Dr Ellis, who was effectively the RBA’s chief economist from 2016 to 2023, said the RBA could even be overestimating the dangers of high inflation.
‘We are mindful, though, that things can pivot quite quickly, and that the RBA’s view of the economy looks somewhat more hawkish than we think is warranted,’ she said.
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