RBA seen cutting rates in July, but caution likely to persist – Westpac

Westpac economists have brought forward their forecast for a Reserve Bank of Australia interest rate cut to July from August, citing softer-than-expected May inflation data. While Commonwealth Bank of Australia shares this expectation for a 25 basis point cut, Westpac cautions that the RBA will likely maintain a cautious tone due to ongoing concerns over domestic inflation and a tight labor market, potentially delaying action despite mounting market pressure.

Analysis

Leading Australian banks have revised their forecasts for the Reserve Bank of Australia's (RBA) monetary policy, with Westpac now joining Commonwealth Bank of Australia in anticipating a 25 basis point interest rate cut at the July meeting, a shift from its previous August projection. This change is primarily driven by softer-than-expected May inflation data. However, Westpac tempers this outlook with significant caution, highlighting that the RBA's decision is not certain. The central bank remains concerned about persistent domestic inflation, a tight labour market evidenced by recent jobs data, and weak productivity growth. Consequently, even if a cut is delivered in July, it is expected to be accompanied by a 'grudging' or cautious tone, with the RBA unlikely to offer any forward guidance on future moves. Westpac's long-term forecast still projects a terminal cash rate of 2.85%, implying further easing, but stresses that the RBA will not pivot sharply and may still opt to wait for the more comprehensive June quarter inflation data before acting.

Key Decisions for Investors

• Investors should consider the increased probability of a July rate cut as a potential positive catalyst for Australian fixed income and rate-sensitive equities, but temper expectations for a strong rally given the RBA's anticipated cautious tone.
• Monitor the upcoming June quarter inflation print and labor market data closely, as these will be critical determinants for the RBA's decision and could easily lead the central bank to delay the cut despite current market expectations.
• Given the lack of expected forward guidance and the RBA's lingering inflation concerns, any dovish positioning should be tactical, as the path to the forecasted 2.85% terminal rate is expected to be gradual and data-dependent, not a sharp policy pivot.