Will the RBA raise rates again next week? Here's what Westpac expects

Is another rate hike coming from the RBA next week?

| More on:
Magnifying glass on a rising interest rate graph.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

On Tuesday, the Reserve Bank of Australia (RBA) is holding its final cash rate meeting of the year.

With inflation beginning to show signs of easing, the market appears to believe that oversized rate hikes are now a thing of the past. In fact, some even believe that periodic monthly hikes may also be nearing an end.

But what are economists saying about next week's meeting?

Westpac is tipping another increase

The economics team at Westpac Banking Corp (ASX: WBC) believe the central bank will raise rates by 0.25% next week. This will take the cash rate from 2.85% to 3.1%.

According to its latest weekly economics report, Westpac's chief economist, Bill Evans, believes this would be "consistent" action, which is something the RBA is aiming for. He commented:

The Minutes of the November meeting revealed a new guideline for monetary policy, "acting consistently would support confidence in the monetary policy framework."

Having unexpectedly pivoted from increments of 50 basis points to 25 basis points in October moving back to 50 would not have been a "consistent" action. The motive of "consistency" does seem to be at cross purposes with the core policy of "[t]he size and timing of future interest rate increases will continue to be determined by the incoming data."

A third 25 basis point lift in December would certainly be "consistent".

However, Evans does highlight that the market isn't as confident as it was about this rate hike. He added:

Markets are pricing around a 75% probability of that 25 basis point move. That is down from over 90% a week ago.

Up until the precedent of the October move even a 75% probability in pricing from the market would be seen as consistent with an almost certain such move in December. But markets had a 90% probability of a 50 basis point move in October and the Board settled on 25. That puts markets on edge that the Board can spring "surprises" and may explain why pricing is so tentative for December.

Market is too dovish

Evans also believes the market is being too dovish on its interest rates estimates and is concerned that things could get very bad if the RBA only delivers on market expectations. He explained:

The RBA's biggest risk with behaving in line with current market pricing for the first half of 2023 is that these forces, along with businesses' recent successful experience in raising prices (75% of CPI components growing faster than 3% annualised in the September quarter) and evidence of a broadening of wage pressures is that an early pause risks this inflation psychology becoming embedded in the Australian economy.

That would see an unsatisfactory pace of inflation in 2023 and 2024 which would preclude the RBA from providing some rate relief to a weak economy in 2024. The policy of least regret, which appears to be a clear strategy in other jurisdictions, whereby the choice of short–term weakness over long term embedded inflation should also be embraced by the RBA. That would certainly not include pausing in December or February.

Motley Fool contributor James Mickleboro has positions in Westpac Banking. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Bank building with the word bank in gold.
Bank Shares

What price targets does Macquarie have on the big 4 banks?

Here's what the broker has to say about the big 4 bank share prices.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Should I buy ANZ shares today?

With a 5.7% dividend yield, are ANZ shares a good buy right now?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Bank Shares

Can Bank of Queensland shares keep outperforming the other ASX 200 bank stocks into 2026?

A leading expert offers his verdict on what’s ahead for Bank of Queensland shares.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Forget CBA shares, Ord Minnett says this ASX bank stock could rocket 50%+

Let's see which bank stock could be a better buy.

Read more »

ASX 200 shares broker downgrade origami paper fortune teller with buy hold sell and dollar sign options
Broker Notes

Are Bendigo Bank shares a buy, hold or sell? Here's Macquarie's latest recommendation

Should I buy the dip on Bendigo Bank shares today?

Read more »

A man thinks very carefully about his money and investments.
Bank Shares

Why these experts say sell CBA shares now

These two investment experts recommend selling CBA shares today. But why?

Read more »

A human-like robot checks out market performance on a laptop, indicating the rise of AI shares.
Bank Shares

Westpac share price drops despite key AI appointment

The banking giant is doubling down on its AI ambitions.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Bank Shares

Should you buy NAB shares in June?

Is this the right time to invest in the ASX bank share?

Read more »