The Chief Economist at Westpac has updated their forecast for the May RBA cash rate announcement. With inflation starting to decline, the bank is predicting the cash rate to peak at 3.6% with no further increases.
The report released 28 April 2023, states that the latest inflation report is enough for the RBA to hold on any further increases, following their guidance in April for more time to assess the current economic outlook.
Cash rate increases impact families and business directly.
“Following the release of the March quarter inflation report Westpac now expects the Board to extend the pause it instigated at its April meeting to the May meeting.”
“We have always argued that May would likely be the peak of the tightening cycle so we are now lowering our forecast cash rate peak from 3.85% to 3.6%,” Bill Evans, Chief Economist Westpac Group.
Annual CPI inflation eases in the March quarter
Annual CPI inflation was 7% per cent in the March quarter, which is down from a 30 year high of 7.8% in the December quarter. While prices continue to rise for most goods and services, these rises have moderated in the most recent quarter, resulting in lower annual inflation.
More time needed to assess the economic outlook
Whilst the RBA is known for hasty decisions and misleading commentary, guidance and over shooting cash rate increases, it appears the recent RBA Review has caused some economists to think the RBA Board will listen to the market and pause on any further increases until a fuller picture is available.
Could the arrogance of the RBA Governor and his ‘let them eat cake’ attitude be waning in the hope that the government will reappoint him following his contract expiry in September? The recent RBA review was pretty scathing and numerous fingers were pointed directly at the Governor Phillip Lowe. In fairness, Phillip Lowe’s salary is over $1,000,000 so there is an expectation that the guy who makes comments that affects millions of Australia’s should get it right at least 99% of the time. Remember what he said back in March 2021…
“Our judgment is that we are unlikely to see wages growth consistent with the inflation target before 2024. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024.””
Inflation can’t be primary decision maker for cash rate changes
The RBA Boards actions over the last 11 months has been to increase the cash rate to combat rising inflation.
Whilst the RBA Governor often refers to the inflation objective of 2-3% target by mid 2025, the inflation target has always been an arbitrary figure plucked from thin air way back in 1993. So, when inflation does increase (as it has) it’s just a nice to have situation to bring it down to 2-3%, there actually isn’t any science to it.
In fact 48 leading economists surveyed by the Economic Society of Australia said Australia should be able to tolerate an inflation rate of 8% or higher.
Australia can handle inflation, in fact inflation increased to over 6% (a similar level to where we are now) when the GST was introduced in 2000. There is no need to keep blasting the cash rate until millions of families and business with mortgages break.
Let’s hope the Westpac Chief Economist is right on this one.