Westpac brings forward home loan rate lift-off to August
Westpac chief economist Bill Evans expects Australia’s central bank will begin its interest rate tightening cycle in August with a 15 basis point hike as strong jobs growth drives faster inflation.
The Reserve Bank of Australia will follow that up with another 25 basis points increase in October, Mr Evans said in a research note Thursday. He had previously seen the RBA’s first hike in February next year.
Mr Evans sees a further five hikes from the RBA from end-2022 through 2023 and 2024, a more aggressive timetable than his expectation of three rate rises from the US Federal Reserve over the period.
The prediction contrasts with signals from governor Philip Lowe, who has repeatedly said the probability of a rate rise in 2022 was close to zero, citing RBA forecasts which point to subdued wages and inflation until late-2023.
“We expect that underlying inflation (trimmed mean) will reach 2.4 per cent in 2021 and lift to 2.6 per cent in March 2022 and 2.9 per cent in June 2022,” Mr Evans said.
“This will mean that by the time of the August meeting the 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).”
He also raised his estimate for the terminal rate to 1.75 per cent from 1.25 per cent as the RBA will need to address “inflation/wage risks.”
Mr Evans cited the latest weekly payrolls report from the Australian Bureau of Statistics which showed a 9 per cent lift in the total wage bill over the year to December 19, with payrolls rising 3.2 per cent over the same period, implying a 5.6 per cent jump in average wages.
The high-frequency measure is impacted by bonuses paid, hours worked and changes in the composition of the work force, all of which are excluded from the Wage Price Index.
“But the sharp increase in this annual growth measure in recent months certainly bears consideration,” Mr Evans said.
Australian labor force data, jobs vacancies and other official numbers on consumer spending, credit growth and housing prices are all pointing to a quick and sharp economic rebound in the final three months of 2021 after a virus-induced contraction in the third quarter.
The rapidly spreading Omicron variant of coronavirus sweeping across Australia does threaten to cloud the economic outlook, but Evans said he expects the hit will be temporary.
Westpac downgraded forecasts for economic growth in Australia’s $2 trillion economy to 5.5 per cent this year, from a previous estimate of 6.4 per cent.
“We do not see that correction as having a significant impact on jobs growth or wages/inflation,” Mr Evans said.
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