The bank still expects the OCR to hit 5.75%
Westpac economists have revised their previous forecast on the back of recent data, and now predict the OCR to further rise – but not until the end of the year.
Kelly Eckhold (pictured above), Westpac’s chief economist, said the big bank is still projecting a 5.75% peak in the cash rate, but moved it out to the November monetary policy statement.
“We had to take an assessment of whether enough data had come out to move the Reserve Bank away from its strong on-hold stance,” Eckhold told Stuff.
“The GDP data was a bit weaker than everyone expected, so it would have claimed that as a win and unemployment ticked up a touch but generally that labour market is still pretty strong. CPI was quite a bit stronger than they would have liked to have seen.
“Generally, we interpret the environment going in the direction we think but the Reserve Bank is strongly in favour of hold at the moment, and we don’t think there’s enough to move their opinion now.”
Another OCR rise was likely because the system still has too much inflation, he said.
“The June quarter CPI outcome was particularly good evidence of that,” Eckhold said. “Non-tradeable inflation really only fell by quite a small amount. That surprised everybody in the market, including ourselves.
“What that tells you, that’s the message we’ve seen in other jurisdictions as well, it takes a long time to squeeze all this inflation out of the system and the longer it takes the bigger the risk that you have to do quite a lot of tightening to squeeze it out.”
Migration remained strong, he said, and the housing market had recovered sooner than expected.
“We also have concerns that the Reserve Bank expects a recession to be in play from the second half of this year, where we are now,” Eckhold said. “Looking at the labour market, we’re not sure that’s realistic right.
“You need to have that period of below-trend growth for a while to bring inflation down. The Reserve Bank had a reason why it was forecasting a recession, that’s what they feel was necessary to do the job. We’re not sure we’ll see that outcome if it keeps the official cash rate at 5.5%.”
With higher OCR not yet priced into home loans, another rate increase could push them higher, he said.
Eckhold said there had been a shift in banks’ interest rates in recent weeks as other countries’ interest rate expectations were upgraded, Stuff reported.
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