Westpac has made a major interest rate forecast, saying it expects the Reserve Bank of Australia (RBA) to hike much sooner than expected.
The bank is anticipating the RBA will hike rates for the first time on 2 August, 2022.
The RBA has maintained it will not lift rates until late-2023.
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Westpac chief economist Bill Evans said developments in the economy prompted the bank to bring forward its prediction.
“We now expect one hike of 15 basis points in August to be followed by a further hike of 25 basis points in October,” he said.
Evans said the reason for the change was that the bank believed the RBA’s economic targets would be hit sooner than the central bank did.
Here is a breakdown of where they differ.
Currently, the RBA is forecasting that underlying inflation will reach the target of 2.25 per cent by the end of 2022 and 2.5 per cent by the end of 2023.
However, Westpac is forecasting inflation will reach 2.4 per cent in 2021 (inflation data for the end of last year has not yet been released) and lift to 2.6 per cent in March 2022.
Westpac thinks inflation will hit 2.9 per cent in June this year.
“This will mean that by the time of the August meeting, the [RBA] board will have observed three consecutive quarters in which annual underlying inflation has achieved or exceeded its target [around the mid-point of the 2-3 per cent range],” Evans said.
The RBA is currently predicting wages growth will hit its target of 2.5 per cent in 2022 and then lift to 3 per cent in 2023.
Westpac, however, thinks wages will be slower to reach the RBA’s target, with a prediction wages will grow from 0.6 per cent in the September quarter to 0.7 per cent in the December quarter.
Evans said the increase in inflation would force the RBA to hike the cash rate, so the lack of wages growth wouldn’t halt the need.
“Achieving the inflation target is a hard condition for any policy change,” Evans said.
“Acceptance that wage growth has consistently lifted towards a speed we have not seen since 2014 should be sufficient to satisfy the bank that the necessary conditions for a rate increase have been achieved.”
Based on Westpac’s predictions, the bank expects wages will show annual growth of 2.75 per cent for the year to March.
As seen in yesterday’s unemployment figures, the jobs market is booming.
The RBA has previously said it believes the unemployment rate will steadily decline, reaching 4.25 per cent at the end of 2022 and 4 per cent at the end of 2023 - a trend that appears to be happening quicker than expected.
The most recent jobless figures put the unemployment rate at the lowest level in 13 years at 4.2 per cent.
Evans said Westpac was anticipating the unemployment rate would hit 3.8 per cent by the end of this year.
“We are more optimistic about the unemployment rate than the Bank’s latest forecasts. Currently the bank expects the unemployment rate to reach 4.25 per cent by end 2022 and 4.5 per cent by the month of June 2022 – our same forecasts are 3.8 per cent and 4.1 per cent respectively," he said.