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The major’s chief economist has said borrowers can ‘lock in’ a 25-bp May rate cut and be ready to ‘pivot thereafter’ should overseas news worsen.
Westpac has reaffirmed its interest rate forecasts for the remainder of the year, predicting three further cuts totalling 75 bps, including a 25-bp cut in May.
In an economic update on Thursday (24 April), Westpac chief economist Luci Ellis referred to tariff turmoil abroad and said developments had “changed the game and flipped the risks”.
“You can lock in a 25bp cut in May, even if the Q1 inflation data are a shade disappointing,” she said.
Ellis reasserted Westpac’s expectation of a 25-bp cash rate cut to 3.85 per cent when the Reserve Bank of Australia (RBA) next meets on 20 May.
“Holding rates steady in the face of the global turmoil and softer momentum in the labour market – for the sake of 0.2 ppts on inflation – would be very hard to explain,” she said.
Westpac also pencilled in two cuts in August and November.
Ellis said that given geopolitical factors, the risks on timing and extent of cuts are now skewed to the RBA moving faster than previously expected and cuts being bigger.
Commenting on global uncertainty surrounding US tariffs and the economic fallout, Ellis said: “A few months ago, the RBA’s main concern was that a still-tight labour market would keep domestic inflation pressures sticky. The risk was that the last 0.2 per cent of inflation – the difference between their February forecasts for trimmed mean inflation and their goal of 2.5 per cent – would not be eliminated.
“Now, however, uncertainty has escalated to a whole new level and the risks have completely flipped. Even though we do not expect the US administration to implement tariffs at the rates originally announced, some damage has already been done.
“Global growth – and especially US growth – will be slower; the response of China will be disinflationary for the world outside the US; and uncertainty is likely to delay decisions on some investment projects.”
Looking ahead, Ellis said that Australia is relatively less affected by US tariffs than some economies and the hit to domestic growth is expected to be moderate.
“Lock in the 25 bp move in May, and be ready to pivot thereafter should the overseas news worsen,” she said.
Tariff turmoil reshapes rate-cutting map
Lenders have warned that escalating global trade tensions have significantly altered the outlook for monetary policy since the RBA Monetary Policy Board last met in April.
Senior economist of the Commonwealth Bank of Australia (CBA), Belinda Allen, said: “Financial market uncertainty and downside risks to global growth have lifted since the time of the meeting.”
She expects the RBA to “cut the cash rate by 25 basis points in May” given the “deteriorating global outlook … despite Australia being in a relatively good position to weather the storm” and two further rate cuts this year to take the cash rate to 3.35 per cent by end of 2025.
ANZ senior economist Adelaide Timbrell said the RBA’s outlook will “change markedly” after US tariff announcements.
Timbrell believes the RBA will ease the cash rate by 25 bps in May, July, and August in order to “offset some of the potential negative impacts arising from global trade and growth risks”.
She noted the RBA’s own cautious language in meeting minutes from May, which “leaves the door open ... for easing ahead of hard data showing impacts of global trade uncertainty”.
Rodrigo Catril from National Australia Bank (NAB) told the NAB Morning Call podcast on Wednesday (16 April) that “the one takeaway is that the RBA, all else equal, is still waiting for more evidence that inflation is coming down and will be coming down”.
While acknowledging the RBA’s “wait-and-see mode” in April, Catril said: “So we still think that the prospect for rate cuts in May – and even a 50 basis point rate cut in May – are still very, very large.”
The major is still forecasting the RBA to cut rates by 50 bps this month, followed by 25 bps in July, August, November, and February.
[Related: Lenders cement May rate cut call after RBA releases minutes]
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