Westpac Updates Monetary Policy Expectations

Westpac has updated its monetary policy expectations, with chief economist Bill Evans projecting a terminal rate of 4.1 percent, up from 3.85 percent. This adjustment comes from the Reserve Bank of Australia’s (RBA) “hawkish” outlook and stronger-than-anticipated inflation figures over the December quarter. In this article, we will explore the implications of Westpac’s updated monetary policy expectations and their impact on the Australian economy.

Implications of Westpac’s Updated Monetary Policy

Westpac’s revised monetary policy outlook includes a revision to its US federal funds rate projection. Bill Evans now expects the fund’s rate to peak at 5.25–5.5 percent, up from 4.75–5 percent. This aligns with the Federal Reserve’s (Fed) recent hawkish stance, as it foreshadows additional hikes over the coming months.

The updated guidance from Westpac reflects the RBA’s hawkish outlook, which comes from stronger-than-anticipated inflation figures over the December quarter, with annualized underlying inflation of 6.9 percent — above market forecasts of 6.5 percent. This has led the RBA to concede “further increases in interest rates are likely to be needed over the months ahead.”

Westpac joins ANZ and NAB in projecting a terminal cash rate of 4.1 percent. ANZ, which also lifted its peak from 3.85 percent, said the nine consecutive hikes to cash rate since May 2022 are yet to curb demand-side inflationary pressures. The Commonwealth Bank is the only big four bank to hold fast to its dovish outlook, predicting one final hike to the cash rate ahead of a monetary policy pause.

Impact on the Australian Economy

The increased cash rate is likely to dampen the Australian economy, as it will make borrowing more expensive for consumers and businesses. This could lead to decreased spending, potentially resulting in slow economic growth. Additionally, the higher cash rate could decrease the Australian dollar, which could hurt exports.

The higher cash rate could also hurt the housing market. Higher borrowing costs could decrease house prices, as buyers may be less willing to take on more expensive loans. This could have a ripple effect on the wider economy, leading to a decrease in consumer confidence.

Related Facts

• Westpac’s Bill Evans now expects the US federal funds rate to peak at 5.25–5.5 percent, up from 4.75–5 percent.
• The RBA’s hawkish outlook comes from stronger-than-anticipated inflation figures over the December quarter, with annualized underlying inflation of 6.9 percent.
• Westpac joins ANZ and NAB in projecting a terminal cash rate of 4.1 percent.
• The Commonwealth Bank is the only big four bank to hold fast to its dovish outlook, predicting one final hike to the cash rate ahead of a monetary policy pause.

Key Takeaways

• Westpac has updated its monetary policy expectations, with chief economist Bill Evans projecting a terminal rate of 4.1 percent, up from 3.85 percent.
• The updated guidance from Westpac reflects the RBA’s hawkish outlook, which comes from stronger-than-anticipated inflation figures over the December quarter.
• The increased cash rate is likely to dampen the Australian economy, as it will make borrowing more expensive for consumers and businesses.
• The higher cash rate could also hurt the housing market, as higher borrowing costs could decrease house prices.

Conclusion

Westpac’s updated monetary policy expectations could significantly impact the Australian economy, leading to a slowdown in economic growth, a decrease in exports, and a decrease in house prices. Therefore, keeping an eye on the RBA’s outlook is important, as any policy changes could significantly affect the economy.