Last week, the Reserve Bank of Australia (RBA) held its latest monetary policy meeting to decide on interest rates.
As was widely expected by the market, the RBA board decided to leave the cash rate unchanged at 4.35%.
The central bank noted that inflation remains above target and is proving persistent. As a result, the board "expects that it will be some time yet before inflation is sustainably in the target range."
What does this mean for interest rates? Will they be going higher before they go lower? Let's see what the economics team at Westpac Banking Corp (ASX: WBC) is saying following the RBA meeting.
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What is Westpac saying about interest rates?
Besa Deda, the Chief Economist from Westpac Business Bank, has been running the rule over the RBA's remarks.
According to the latest Westpac Weekly economic report, Deda notes that the central bank doesn't sound overly confident that inflation will fall to its target range. The chief economist said:
Governor Bullock's remarks, together with the changes to the accompanying Board statement, reveal the RBA has become more alert to upside inflation risks. Additionally, the Board appears less confident inflation is moving sustainably towards the inflation target within a reasonable timeframe.
In perhaps one of the more telling remarks of the press conference, Bullock said "we need a lot to go our way if we are going to bring inflation down to the 2–3% target" and the economy's narrow path is "getting a bit narrower."
However, the good news for borrowers is that Deda doesn't believe the RBA will take interest rates higher from here. This is because Australia's oldest bank continues to believe that the next quarterly inflation reading will come in lower than what the RBA is forecasting.
In light of this, Westpac remains confident that the next move by the central bank will be to lower interest rates in November. She added:
Our inflation forecasts for the upcoming June quarter report are below that of the RBA's, leaving us comfortable with our view that the next move in the cash rate will be down and arrive in November. But we acknowledge there's a greater risk of rate relief slipping into next year. Swap markets have no rate cuts priced for this year and two rate cuts priced in for 2025. The timing of the first rate cut has been pushed out from February to April next year after today's meeting.
Westpac is forecasting interest rates to fall to 4.1% in November, 3.85% by March 2025, 3.35% by September 2025, and then 3.1% by December 2025.
