📝 Expect RBA to Hold Rates Next Week: Westpac

It is unlikely that the August monthly Inflation Indicator is a game changer. Annual inflation lifted from 4.9% in the year to July to 5.2%, mainly reflecting a 9% lift in petrol prices. A more reliable monthly Indicator than the Trimmed Mean monthly, which excludes volatile items, actually slowed from 5.8% to 5.5%.

The market is currently giving around a 40% chance of a rate hike in November lifting to 90% in March.

Despite this market pricing, which is also indicating no rate cuts until 2025 we expect that the cash rate will remain on hold until August next year when the first rate cut can proceed. Our forecast for the conditions the Board will be facing by then

will be an inflation rate that has fallen from 4.1% to 3.4%; an unemployment rate of 4.5%; and economic growth through the year to June of 1.0%.

One argument we see for the expected rate hike by March is that Australian rates are just too low relative to other central banks.

As we show in Figure 2, the shape of the US yield curve continues to be consistent with a recession. But in recent weeks yields have risen and the curve has begun to flatten – a bear flattener where long bond rates have risen by more than short rates

That lifting of the yield curve has also impacted the near term prospect for the RBA, but reflects, in our view, more of a curve movement driven by rising long rates than the expectation of an RBA rate hike

- Westpac