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Two of the four major banks now believe that the central bank will start cutting the official cash rate in May, but see consecutive cuts on the horizon.
Westpac has become the latest major bank to revise its forecasts for the trajectory of the official cash rate, pushing back its call for the first rate cut from February 2025 to May 2025.
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While all four major banks had expected the Reserve Bank of Australia (RBA) to begin the easing cycle in February 2025 at the beginning of this month, revisions are now being made following new data.
National Australia Bank (NAB) last week amended its forecast for the first rate cut from February to May 2025 given the stronger-than-expected labour market, for example, and Westpac has now also pushed back its rate cut call to May.
Speaking of the change, Westpac Group’s chief economist (and former assistant governor [economic] at the RBA), Luci Ellis, said that the “most likely scenario for the path of the RBA’s cash rate” was for the rate-cutting cycle to begin in May, followed by consecutive cuts.
In an economic update, she said: “We have revised our view of the most likely scenario for the path of the RBA’s cash rate, pushing out the start date of the rate-cutting cycle from February to May.
“Similar to the pattern in some peer economies, we expect the initial moves to be somewhat front-loaded, with consecutive cuts in late May and early July. This is also a change from our previous expectation of a moderate pace of decline of one cut per quarter.”
Ellis said that an earlier cash rate cut could still be possible, but wasn’t any more likely than a May start, and that a later start date could also materialise if inflation does not decline as the RBA is currently forecasting.
She said that the recent minutes released by the RBA and its recent rhetoric suggest a February rate cut may be too early, particularly as the RBA said it wants to return inflation to target within “a reasonable timeframe while preserving as many of the gains in the labour market as possible” and “would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable”.
“It suggests that they will wait for longer than we previously believed,” the Westpac chief economist said.
“We are mindful, though, that things can pivot quite quickly, and that the RBA’s view of the economy looks somewhat more hawkish than we think is warranted.”
Westpac continues to expect that the terminal rate would be 3.35 per cent, which it expects to be reached by the end of 2025.
[Related: Major bank moves rate call]
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