RBA adopts ‘dovish tilt’ despite data revelations: Westpac

Westpac chief economist Bill Evans has stated that while there is clear evidence that the Reserve Bank of Australia (RBA) has “significantly more work to do”, the markets have not responded and that the net 25-bp decline in rates has held firm since deputy governor Michele Bullock’s speech on 10 November 2022.

The deputy governor’s sentiments were echoed by the minutes of the November board meeting, according to Mr Evans.

A comment in the minutes stated: “The Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook.”

Further stated in the minutes was that “the September quarter inflation data were a little above the Bank’s forecast”.

“That statement certainly contrasted with our own assessment that the data was significantly higher than ours and the market’s forecast (underlying inflation printed an actual of 1.8 per cent against an expected 1.5 per cent),” Mr Evans stated.

He added that it was “somewhat surprising” that the rhetoric from the board and the deputy governor took an “opposing dovish tilt” in the face of the need to lift the underlying inflation forecast for 2022.

“Perhaps that approach was in anticipation that the data associated with the labour market would support a more dovish tilt to the policy outlook — even going so far as some analysts anticipated that the ‘pause’ could occur as early as the December meeting,” Mr Evans said.

Mr Evans commented even though market pricing has rates trending higher in 2H23, he believes that it’s more about the market giving a “20 per cent chance” that the RBA will be required to continue lifting rates throughout 2H23 “due to a dangerous resistance of inflation to the extremely likely collapse in economic activity at that time”.

According to Mr Evans, the major bank is expecting 25-bp increases in cash for December, February, March, and May for a final rate of 3.85 per cent, approximately 30 bps above the market’s outlook for May 2023.

“The evidence that tight labour markets and very high inflation will extend into 2023 has become clearer,” Mr Evans stated.  

“A central bank, confronted with such developments, which decides to pause can only do so on the basis of clear confidence in their forecasts that inflation is set to ease significantly.”  

[RELATED: 2.85% November cash rate announced]