Australia’s big four banks are forecasting future interest rate rises, ignoring bets in financial markets that the cash rate has reached its peak.
ANZ, CBA, NAB and Westpac believe the RBA will lift its key interest rate by at least another 25 basis points, based on economic data already released. Earlier this month, the RBA hiked the rate for a record 10th consecutive time to 3.6%.
Investors responded to turmoil in financial markets over the past fortnight by slashing expectations about RBA rate moves, predicting the next move would be lower, after US authorities rescued Silicon Valley Bank and two others and the Swiss government helped UBS take over the ailing financial services company Credit Suisse.
Investors expect the RBA to pause its interest rate hikes in April, with the next move a cut. Commercial bank economists are not so confident that the RBA's job is done. pic.twitter.com/MSLJltdk6h
— @phannam@mastodon.green (@p_hannam) March 24, 2023
However, the US Federal Reserve, the Bank of England and even the Swiss National Bank each lifted official interest rates this week, viewing the fight against inflation higher priority than easing the squeeze on their respective economies.
Australia’s main commercial banks think the RBA have at least as much reason to stay on its inflation-beating course given the relative stability of the country’s financial system. The treasurer, Jim Chalmers, this week said he was receiving twice-daily briefings and that “our banks are well-regulated, well-capitalised and highly liquid and are in a better position than most to deal with these disruptions”.
Of the big four, ANZ and NAB predict the RBA will lift its cash rate by 25 basis points in both April and May, bringing it to a peak of 4.1%. CBA is currently forecasting an April quarter-point hike before a peak, while Westpac predicts a pause then a May rise of that size.
The average owner-occupier with a $500,000 mortgage at the start of the rate hikes (May 2022) with 25 years remaining has already seen monthly repayments rise $983 (42%) to $3,318, according to RateCity.
ANZ economists said recent data, including the drop in the jobless rate back to 3.5% in February, “were consistent with further tightening in April and May”. They expect next Wednesday’s release of February consumer price inflation to come in at an annual rate of 6.8%, down from January’s 7.4% pace.
NAB’s chief economist, Alan Oster, said the RBA was “really close to a peak”, with cuts likely to begin in early 2024. The cash rate should be down to about 3% by mid next year.
Oster said February CPI may come in at 7.2% but cautioned that “lots of things are only counted in the final month of the quarter”, so March numbers could still turn out higher.
CBA’s chief economist, Gareth Aird, said the CPI figure may drop to 6.9%.
“We believe the [RBA] board would like to pause in their tightening cycle next month,” Aird said. “The board may feel the need to put through another 25 basis point rate hike in April if the domestic data next week prints on the firmer side, given the strength in the February labour force data and the latest NAB Business survey.”
Westpac economists predict the RBA will be stirred back into action in May after an April pause following “strong” first-quarter CPI numbers on 26 April.
“Developments thereafter will be centred on the abrupt slowing of growth and easing inflation over the second half of 2023,” they said. Easing will begin next year and see the cash rate slashed by 150 basis points by mid-2025.
The RBA’s governor, Philip Lowe, earlier this month said the Reserve Bank was “closer” to pausing the rate rises, but the board would be guided by the data.
Economists have noted investor forecasts, but caution that their expectations are based on a distribution of forecasts. At the extremes, they range from more interest rate rises to curb inflation and another global financial crisis forcing deep rate cuts – the latter precisely what central banks and other regulators have been striving to avoid.
RBA officials have stressed that inflation remains broad-based and well above the 2-3% target it aims for over time. The assistant governor, Christopher Kent, also highlighted this week that average households remain about one year ahead on mortgage repayments, giving them a buffer that is moderating the impact of higher rates.
Data from CoreLogic for the first three weeks of March indicates property prices in the state capitals have posted modest rises, halting a slide over the past year for most cities.
“Population growth from a strong bounceback in overseas migration is part of [the rise],” Eliza Owen, an economist at CoreLogic, said.
However the rebound may be temporary because the expiry of 880,000 fixed-term facilities this year, a looser labour market, and some uncertainty around the trajectory for inflation and interest rates, Owen said.
“This has made us a little uncertain as to whether this is really the bottom of the market, but it’s not out of the realm of possibility.”
