📝 Extending Estimate Of RBA Tightening Cycle End From February to March: Westpac

In my 30 years following RBA policy and markets, I cannot recall the RBA moving against market expectations when the probabilities have been so high.

Westpac had expected a 25 basis point move until we were obliged to lift our forecast for the terminal federal funds rate by 125 basis points to accommodate a much more aggressive guidance from the FOMC and upside surprises on US inflation.

With the surprise 25 basis point move, the market lowered its terminal cash rate by around 50 basis points. Central banks like to see the markets doing their job for them, so a fall in the fixed rates only adds to the task of easing demand pressures.

The RBA has not ruled out returning to “50’s” should the data so demand, although we think the hurdle to going by 50 now will be very high. At the time of the announcement, we interpreted these likely unintended consequences as justifying no change to our terminal rate of 3.6% but extending the length of the tightening cycle. We have extended our estimate of the end of the tightening cycle from February to March.

- Westpac