![]() May’s 50bp increase is therefore expected to be followed by two more 50bp hikes in June and July to 1.875% - the lower-end of the Committee’s neutral range of 2-3%. Consequently, the FOMC plan an aggressive start to the policy normalisation process, to be followed by ‘fine tuning’ as neutral approaches. They also recognise the scale of the supply-side inflation pressures and the risk to inflation and wage expectations if actual inflation is not reined in quickly from 8.5%yr/6.6%yr on a CPI/PCE basis at March 2022 towards the 2.0%yr medium-term target. Very clearly, the FOMC has strong confidence in the US economy thanks to historically-low unemployment and strong consumer balance sheets. In the US, a similar perspective of the outlook was presented by the FOMC, albeit while recognising the greater risks the US currently faces from inflation. Given the high debt levels of Australian households, this level of rates is expected to materially reduce momentum through 2023, dissipating demand-driven inflation pressures and allowing the RBA to go on hold. In 2023, we see two additional hikes in February and May to a peak cash rate of 2.25%. The full detail of the RBA’s forecasts will be provided today in the May Statement on Monetary Policy (released at 11:30am) but for policy, it is particularly notable that Tuesday’s decision statement reported underlying inflation is still expected to be at the top of the RBA’s target range in mid-2024 (3.0%, previously 2.75%).Īs detailed by Chief Economist Bill Evans following the decision, given the RBA’s views and our own, Westpac believes it is appropriate to front-load the normalisation of policy, a 40bp hike to come in June and be followed by a string of 25bp increases in July, August, October, and November, taking the cash rate to 1.75% by year end. Doing so quickly however is justified more by their revised expectations of inflation, the RBA’s view on underlying inflation at end-2022 revised up 2ppts to a materially above-target 4.75%. The downward revision in the unemployment rate to 3.5%, a level it expects will be maintained through 2023, emphasises the strength of Australia’s economy and gives cause to begin removing accommodation. ![]() In Australia, the RBA surprised the market consensus by announcing a 25bp increase in the cash rate to 0.35% instead of 15bps. All raised rates and, to varying degrees, highlighted the risks pertaining to inflation. Three key developed market central banks met this week.
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