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Westpac forecasts terminal cash rate at 4.1%

The major bank announced it has lifted its RBA cash rate forecast from 3.85 per cent to 4.1 per cent.

Westpac has held the view that the cash rate would peak at 3.85 per cent in May 2023, however, according to Westpac chief economist Bill Evans, the Reserve Bank of Australia (RBA) has adopted a “more hawkish approach” since the release of the December quarter inflation report.

Westpac now falls in line with other major banks’ forecasts, namely ANZ and NAB, which also recently lifted their cash rate forecasts to 4.1 per cent in May 2023.

According to ANZ’s research, persistence in inflation pressures suggested that the cash rate will remain “in restrictive territory for some time”, thus the major bank does not expect the RBA to begin easing the cash rate until a 25-bp cut in November 2024.

Of the big four banks, the Commonwealth Bank of Australia (CBA) has held firm that the cash rate will still peak at 3.85 per cent in May as the other majors previously predicted.

Mr Evans noted that the governor outlined his support for a “steady approach to policy” during his two appearances in Canberra.

“Abruptly pausing in April, only to resume with a hike in May (as implied by our previous forecast) would not be consistent with this steady approach,” Mr Evans said.

“Another way to maintain the 3.85 per cent terminal rate and eliminate the pause in April would have been to bring forward the May hike to April.

“At 4.1 per cent, the cash rate will be in deeply contractionary territory and a pause will be appropriate.

“The decision to pause will be with a reasonable view that the tightening cycle has peaked. Westpac concurs and expects that the next move in rates beyond mid-2023 will be the beginning of an easing cycle in the March quarter 2024.”

Mr Evans further stated that the Reserve Bank seems “locked into further hikes” in both March and April and that the revised forecasts and March quarter inflation report would likely necessitate a further hike in May.

“With the concerns about a wage-price spiral easing following the December quarter Wage Price Index report; demand slowing; and the cash rate deeply contractionary, at 4.1 per cent, the case for a pause in June is credible,” Mr Evans said.

The RBA made its ninth consecutive rate hike in early February 2023, which has brought the official cash rate up to 3.35 per cent.

During the RBA’s monetary policy minutes (released on 21 February), the central bank stated that the chance of a pause on the 7 February cash rate hike was not an option.

[RELATED: Pause excluded in February rate hike decision: RBA]

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