23/06/2021
CBA calls interest rate hike in late-2022 đ˘
The strength of the economy will force the Reserve Bank of Australia to normalise monetary policy and lift the cash rate in late 2022, Commonwealth Bank head of Australian economics Gareth Aird says.
The CBA prediction is in line with futures market expectations and follows Westpac chief economist Bill Evans, who brought forward his prediction to early 2023 after a âphenomenalâ jobs figure in May.
âFor the past six months CBAâs economic forecasts for the Australian economy have been at odds with the RBAâs â2024 at the earliestâ forward guidance on the cash rate,â Mr Aird said.
âOur central scenario has the RBA delivering the first hike in the cash rate in November 2022. We have pencilled in an increase of 15 [basis points] which would take the cash rate to 0.25 per cent.â
The CBA is also predicting a further 25 basis points increase in December 2022, followed by a further three 25-point increases in each of quarters one, two and three in 2023.
âThat would take the cash rate to 1.25 per cent, the level at which we assess the cash rate to be neutral,â Mr Aird said.
âThat would take the cash rate to 1.25 per cent, the level at which we assess the cash rate to be neutral,â Mr Aird said.
The RBA has become increasingly isolated in its thinking rates will not lift until â2024 at the earliestâ; however, the central bank has started moderating its language in recent weeks.
Last month, deputy governor Guy Debelle said the timeframe for when the cash rate would begin to increase would be based on the âstate of the economy ... not the calendarâ.
Economists also noted a shift in language from governor Philip Lowe last week â from rate increases were âunlikelyâ until 2024 âat the earliestâ, to them being âstill some way offâ.
âIf the likelihood of a move in 2024 is increasing, then a move earlier is also more possible,â ANZ head of Australian economics David Plank said. âSo we do think the shift in Loweâs wording around forward guidance is deliberate.â
Bank watchers will be analysing every word of Dr Loweâs press conference following the RBAâs July 6 meeting.
Futures markets brought forward expectations for a hike to September 2022 last week after Mayâs labour force data showed 115,000 jobs were added over the month, driving the unemployment rate to 5.1 per cent, a level last seen in February 2020.
âThe economic backdrop today is so much more conducive to higher wages and inflation than it was preâCOVID,â Mr Aird said.
The RBA is determined to generate wages growth above 3 per cent and inflation sustainably between 2 per cent and 3 per cent, before normalising monetary policy and lifting interest rates above current historic lows.
Bank bill futures now imply a cash rate of 0.25 per cent by September 2022, which would equate to a 15 basis point increase in the next 15 months.
The market expects the rate to increase to about 1.2 per cent by June 2024, which would equate to about four 0.25 percentage point hikes from the current 0.1 per cent.
However, there are risks to a 2022 hike date, according to the CBA, primarily from an acceleration in labour market supply when the international border reopens.
âWe believe that the RBA cannot achieve their objectives of full employment and inflation âsustainably in the targetâ without the assistance of the Commonwealth,â Mr Aird said.
âMore specifically, fiscal settings need to remain stimulatory and net overseas immigration cannot catapult back to strong preâCOVID levels if wages growth is to remain at 3 per cent per annum or above.â
CBA announced on Friday it had increased the interest rate floor on which it assesses the borrowing capacity of new home loan customers to 5.25 per cent, from 5.1 per cent.
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