RBA likely to tighten financial conditions further

Markets are on alert for an unexpected near term rate cut from the RBA in response to Westpac's decision to raise the variable mortgage rate by 20 basis points.

Markets are asking the question as to whether the RBA will move to offset that tightening by cutting rates as early as the next Board meeting on November 3. The market probability for a cut in November has increased from 25% to 40% since the Westpac announcement.

"The history of the Reserve Bank's policy in relation to banks' pricing is assessed. Based purely on history the most likely outcome is that financial conditions are likely to tighten further, although the exact degree of tightening and its timing is uncertain", says Westpac.

The RBA will await this information on the effective change in financial conditions before making a decision as well as assessing any early signs of the impact of this tightening on the economic outlook.

"When this information becomes clearer we will reassess our current view, which, at this stage is for no policy change in 2015 or 2016", added Westpac.