Following the Reserve Bank’s surprise decision to abandon its patient approach to monetary policy, Westpac now expects a sequence of hikes covering most months of 2022, reaching a cash rate of 1.25% by year’s end, with cash rate peaking at 2% in June 2023.
Bill Evans, Westpac’s chief economist, said that since the last board meeting, when “patience” was emphasised, unemployment rate has slipped further, from 4.2% to 4%, and job vacancies continued to surge pointing to further falls in the unemployment rate through the rest of 2022.
Accordingly, the bank has revised its forecast for the unemployment rate, from 3.75% to 3.35% by year’s end.
“That much tighter labour market in turn points to a stronger lift in wages growth in 2023 with a peak of 4% now expected compared to our previous peak of 3.5%,” Evans said.
Also revised was Westpac’s forecast for the US federal funds rate, which is now expected to peak at 2.375% by the end of 2022.
“We expect the RBA has also been raising its own expectations for the federal funds rate in the wake of recent data releases and the strong rhetoric from FOMC members, including Chair Powell,” Evans said.
Evans noted that this shift by the RBA Board – from a “patient” to a more proactive approach to monetary policy – is in the context of an election campaign through most of April and the first half of May.
“By establishing a clear expectation that the board will now begin the tightening cycle in June, the RBA is willing to risk political controversy, particularly around any potential discussion of the role of the federal budget in changing the board’s stance,” he said. “Being aware of such complications but still being prepared to change the stance emphasises the Board’s determination to change the policy message.”
