Where will the official cash rate end up? How will the increases be distributed and what will the timing of these increases be? These are all good questions and Mr David Plank one of the big Four Banks economists has added fuel to the fire with his prediction of aggressive rate hikes.
The Reserve Bank of Australia (RBA) is expected to maintain its aggressive monetary policy setting, which might bring the cash rate to 3.35 percent by the end of 2022, according to ANZ’s head of Australian economics David Plank. The momentum in the job market and clear upside risks to inflation indicate that restrictive rate settings are required sooner than previously thought, according to David Plank.
“We don’t think the RBA will be comfortable with policy merely getting to neutral by year-end given this backdrop,” Mr Plank advised. “Our expectation is that the RBA will deliver this via four more successive 50bp rate hikes in August, September, October, and November — this 200bps of additional tightening sees the cash rate target at 3.35% by November.”
Mr Plank said that the Reserve Bank of Australia (RBA) might choose to move by more than 50 basis points at one or more of its upcoming meetings to get the cash rate target closer to 0.25%. He added that “At this stage, our thinking is that the cash rate will need to remain at this restrictive setting for an extended period, given persistence in core inflationary pressures, but we are conscious the downside risks to the economic outlook will increase with such a rapid move to a restrictive setting.”
The labour market continues to show signs of momentum. According to Mr Plank, one of the driving forces behind the upturn in monetary policy is the June labour market data, which came out stronger than expected. The unemployment rate was 3.5 percent in June, which was the lowest level since 1974.
“Our longstanding forecast has been for unemployment to drop to 3.3% in the later part of 2022 — the risks to this forecast look to be weighted to the downside, even with somewhat faster rate hikes than previously. An unemployment rate with a 2-handle is not out of the question,” Mr Plank said.
The quicker the switch to a tight rate setting, the faster things might get to a tipping point where growth slows down below trend. It might also indicate that house prices will drop by more than 15% at the end of 2023. “But it doesn’t necessarily imply an abrupt economic downturn.”
However, despite the quicker pace of rate hikes, wage increases are anticipated to accelerate throughout the year and into 2023. “Moreover, we believe that wage growth will be quite persistent even as the economy slows,” Mr Plank added. This should keep household consumption from declining too rapidly, as will the large pool of savings and tax cuts scheduled for 2024. However, if a shift to rate reductions by the RBA is going to happen, we would need to see a sharp Global downturn, at this point though rate cuts seem unlikely.
Other top bank economists are saying, the Reserve Bank of Australia will raise rates by 50bps in August and September. In October, the RBA is expected to pause before delivering a final 25bps boost in November. According to CBA’s head of Australian economics Gareth Aird, while the RBA could lift rates by 50bps in August and September, it would most likely take a break in October and then raise them again by 25bps in November
In summary it seems that although most economists cannot agree on when or where the cash rate will hit its peak or how the RBA will deliver the rate increases, the one thing everyone agrees on is that interest rates will rise and continue to rise until such time that the RBA is happy that inflation has returned to a more acceptable level. The advice is that now more than ever, it is important to reach out to an expert and ensure that you have the right structure, the best product, and a competitive rate for your home loan and circumstances. Although it may seem like doom and gloom, as the media is reporting, but the RBA are well aware that they are walking a tightrope and the effects rate rises have on the economy. Watch this space.