Westpac now expects the RBA to pause in April followed by a final 25 basis point increase in May. 

Westpac economists' decision to alter their cash rate prediction may be premature, considering February’s monthly inflation figure comes out mid-next week - a key data set the RBA plays close attention to when assessing the cash rate.

Westpac Chief Economist Bill Evans (pictured above) said the CPI February report will likely jump back to an annualised figure of 8%.

Quarterly inflation data will also be released late April.

“Westpac is skeptical and expects the monthly indicator to lift again, by 0.6% in February, with the January update overstating the extent of slowing,” Mr Evans said.

This forecast also comes as February’s unemployment rate returned to 3.5% - signalling the potential for the RBA to hike in April as it indicates the economy is robust. 

“Despite the better than anticipated employment report, we expect the risks around financial market developments and the evidence of the soft data since the February Board meeting will prompt the RBA to use its ‘pause option’ in April,” Mr Evans said.

Uncertainty in international banking 

Mr Evans said the change follows the current adverse developments seen in global markets, specifically the outlook for the US banking sector and economy.

Notably, the collapse of Silicon Valley Bank and investment bank Credit Suisse being the world's first 'systemically important' bank to be bailed out by a central bank, are reasons for Westpac's change of tune.

“As we write, the most realistic risk scenario for the US economy involves a credit squeeze from regional banks,” he said.

“As markets, regulators and rating agencies restrict the capacity of these smaller banks to support SMEs and small businesses - around 50% of total market coverage - a new drag will emerge for the US economy. 

“This is also likely to undermine confidence and raise some questions about the stability of the global banking system.”

Blossom investment manager Christian Baylis also says Australia is not a bubble and is susceptible to uncertainties abroad. 

"Australia will be caught in the vortex of what happens offshore – because ultimately we find ourselves in international markets. As the saying goes, the US sneezes and we catch a cold," Mr Baylis said.

"In practical terms, this will mean lower equity markets and a more restrictive funding environment."

Westpac predicts the US Federal Reserve will raise rates just once more next week by 25 basis points, not half a percentage point as had previously been tipped.

With that in mind, Mr Evans believes the RBA will take a cautious approach in light of global uncertainties.

"Even if the markets settle by the time of the RBA's April board meeting there will be sufficient uncertainty for a prudent board that was already clearly open to a pause to take that option,” he said.

“Positioning prior to the recent market turmoil is key here.”

Westpac’s rate cut forecast for the RBA remains unchanged, noting the easing cycle will be apparent in the March quarter of 2024. 

“This is preconditioned on a fall in the inflation rate to below 4%; policy deeply in contractionary territory; the economy stagnating through the second half of 2023 and the prospect of continued weakness in the first half of 2024; the unemployment rate heading towards 5% by end 2024; and wages growth slowing from a 2023 peak of 4%,” Mr Evans said. 

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