Shares in Westpac Banking Corporation (ASX: WBC) finished up in the green today, up 1.63% despite no price-sensitive news.
Noteworthy, however, was that the Reserve Bank (RBA) hinted it may reduce the size of its future interest rate hikes in an effort to combat inflation.
The Vaneck Australian Banks ETF (ASX: MVB), an index fund tracking the sector, also finished 2% higher on the day.
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Inflation 'surprise' now understood
In his speech to the Anika Foundation today, RBA Governor Dr Phillip Lowe said the recent lift in inflation had "come as a surprise".
"A year ago, the RBA was forecasting that inflation over 2022 would be just 1.75%. Now, we are expecting CPI inflation this year to be around 7.75%," he said.
"This is a very big change and a very large forecast miss."
Lowe added that the magnitude of the miss-step had led to some "soul searching" from forecasters at the RBA.
Despite the downbeat tone to start the speech, the RBA Governor also said that measurements suggested there was confidence that inflation would return to targets of 2–3% per year. He added:
The Board is committed to doing what is necessary to ensure that inflation returns to target over time. High inflation is a scourge. It damages our standard of living, creates additional uncertainty for households and businesses, erodes the value of people's savings and adds to inequality.
And without price stability, it is not possible to achieve a sustained period of low unemployment. It is important, therefore, that this current surge in inflation is only temporary and that we once again return to the 2 to 3% range.
The Board is committed to the return of inflation to target.
As he went on, he predicted further interest rate rises, but that, all things being equal, "the case for a slower pace of increase in interest rates becomes stronger" with each subsequent hike.
As to how far the hikes will go, we will have to wait on the economic data.
Nevertheless, the potential weaker outlook on inflation and rising rates was deemed to be a positive for ASX bank shares such as Westpac today.
This could serve as important information in following the sector when looking ahead.
Westpac shares are down 18% in the past 12 months.
