Westpac says RBA hold looks entrenched despite hawkish inflation guardrail
Westpac's read draws a sharper line than the RBA's own statement suggests, treating the narrower "if upside risks materialise" language as evidence the Board has effectively downgraded its hike bias even while refusing to say so explicitly. Westpac's own base case has firmed toward an extended hold running through to the middle of next year, a view built on inflation and labour market data that have both undershot the RBA's May forecasts. Westpac is nonetheless careful to frame this as a hawkish hold rather than an all clear, noting the Board is deliberately slow to relax given inflation risks it still assesses as skewed to the upside. That leaves a live, if secondary, probability of a further hike still to be priced through the remainder of the year, contingent largely on how far energy related pass through and Middle East developments run from here.
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Earlier:
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The RBA still says it might hike, but Westpac thinks the data has already made that increasingly unlikely.
Summary:
- Westpac chief economist Luci Ellis says the RBA's decision to hold at 4.35% was widely expected, but the accompanying language, that the Board is prepared to hike only if upside inflation risks materialise, is narrower and more specific than May's looser "if needed" wording
- Both headline and trimmed mean inflation have come in below the RBA's May forecasts, and the labour and housing markets are both weaker than expected, with early strong pass through from higher energy prices having since tapered off and undershot the RBA's expectations
- Unlike June, when a hike was not even contemplated ahead of Q2 CPI, this month's meeting did involve consideration of a hike, though the RBA's own base case forecasts, showing inflation below the target midpoint by 2028, did not support one
- The RBA is not ready to rule out further hikes, remaining concerned that energy price pass through could persist and that renewed escalation in the Middle East conflict could push energy prices, and pass through, higher than forecast
- Westpac says some parts of the RBA's labour market tightness assessment are complicated by changes to the Labour Force Survey, while other measures, including capacity utilisation and business difficulty finding labour, point to a clearer easing signal
- The bank also flags an inconsistency in the RBA's treatment of the AI and data centre investment boom, which is acknowledged as an inflation risk via construction capacity and global semiconductor demand, without any offsetting allowance for productivity gains from that same investment
- Westpac's base case remains an RBA hold through to the middle of next year, characterised as a hawkish hold, with some risk of a later hike this year that is not the bank's central forecast
The Reserve Bank of Australia's decision to hold the cash rate at 4.35% in August was fully anticipated, according to Westpac Group chief economist Luci Ellis, who argues the more interesting signal lies in how the Board's guidance has shifted rather than in the decision itself. The accompanying statement said the Monetary Policy Board stands ready to raise rates only if upside risks to inflation materialise, language Ellis describes as narrower and more specific than the broader "if needed" framing used in May, and reads as evidence the RBA has effectively concluded that an extended hold is now its base case.
That conclusion follows a run of data that has broken against the Bank's earlier hawkish positioning. Both headline and trimmed mean inflation have printed below the levels the RBA forecast in May, while the labour market and housing market have both come in weaker than expected. Westpac notes that the initial pass through from higher energy prices arrived quickly and in significant size, consistent with the bank's own earlier call, but has since tapered off and undershot the RBA's expectations.
Ellis draws a clear distinction between this meeting and June's, when a hike was not even on the table because the Board was in a wait and see posture ahead of the second quarter CPI print. This time, a hike was genuinely discussed, but the RBA's own forecasts, which show inflation dropping below the midpoint of its target band by 2028, ultimately did not support taking that step. Softer inflation and labour outcomes have also strengthened the Bank's confidence that current policy settings are somewhat restrictive, a judgement it held with less conviction earlier in the year.
Even so, the RBA is not prepared to close the door on further tightening. Westpac says the Board remains concerned that pass through from energy prices into broader inflation could persist longer than currently expected, and that any fresh escalation in the Middle East conflict could push energy prices, and associated pass through, higher than forecast. The RBA also continues to view the labour market as somewhat tight, although Westpac notes that some of the usual gauges have been distorted by changes to the Labour Force Survey, with cleaner measures such as capacity utilisation and reported difficulty finding suitable labour pointing to a more definitive easing trend.
Westpac raises a further tension in the RBA's own analysis around artificial intelligence and data centre investment. The Statement on Monetary Policy treats the AI boom as an inflation risk, through pressure on domestic construction capacity and global semiconductor demand, yet does not factor in any offsetting productivity benefit from that same investment, despite acknowledging the boom has run stronger than the RBA expected in May. Ellis also questions why the Bank's forecasts show only limited evidence of construction labour being drawn away from other projects toward data centre builds, suggesting an implicit assumption that this crowding out is nonetheless occurring.
Westpac's own base case remains an RBA hold running through to the middle of next year, though it characterises this as a hawkish hold rather than a clean signal that the tightening cycle has ended, given the Board's continued emphasis on upside inflation risk. The bank says investors should allow for some probability of a further hike later this year, even though that scenario sits outside its central forecast, and argues that downside risks to inflation deserve as much attention as the upside risks the RBA has chosen to highlight.
This article was written by Eamonn Sheridan at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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