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Ahead of the Reserve Bank of Australia’s (RBA) March rate decision next Tuesday (17 March), National Australia Bank (NAB), the Commonwealth Bank of Australia (CBA) and Westpac have all updated their outlook for the cash rate.
These banks had previously been forecasting just one additional hike in May following the February rate decision.
Now, however, they expect the central bank to deliver a 25-basis-point rate hike in March, followed by another increase in May, which would bring the cash rate to a new peak of 4.35 per cent this cycle.
However, Australia and New Zealand Banking Group (ANZ) is still forecasting just one additional hike in May.
While CPI inflation continues to run above target at 3.8 per cent, global developments are also increasingly weighing on the outlook.
RBA governor Michele Bullock recently indicated that the latest military escalation in the Middle East could complicate already-elevated inflation, with the central bank noting the domestic economy may be running hotter than previously expected.
Cautious optimism remains
Although brokers diverge on what will happen at the next rate call, they remain prepared and optimistic about the longer-term outlook.
Brokers from Home Loan Experts said they see only a small probability of another rate rise, with the more likely outcome being that rates remain on hold.
Jonathan Preston puts the hike probability at under 25 per cent, expecting a wait-and-see approach given Middle East and shipping uncertainty.
Sid Bajracharya cited ASX 30-Day Interbank Cash Rate Futures showing 78 per cent expectation of a hold and noted the board typically waits for a full quarter of inflation data before moving again.
Sheng Ye expects the RBA to take more time after February’s hike.
However, despite the hold call, all three said the lending environment is already shifting independently of the RBA’s decision. Fixed rates are rising, lender assessment criteria are tightening, and the yield curve is pricing in higher rates over the longer term, they said.
Luke Camilleri, senior broker and director of Mortgage Choice Parramatta, said the current rate environment is prompting him to tailor advice more carefully depending on the borrowers’ circumstances and risk tolerance.
Speaking to Broker Daily, Camilleri said: “For our first home buyers and some refinance clients we are recommending fixed rates and making sure they take up rate lock. Rate lock secures the rate for the borrower, if it was to increase prior to settlement and that comes with a fee in some cases. It’s an insurance which we are highly recommending.
“For some existing home owners, rates are not at the peak of where they were so we are finding they are more inclined to continue on variable, so it is really different conversations depending on the borrower’s circumstances.”
Graeme Salt, director of Sydney-based Origin Finance, said that while the current market conditions may weigh on confidence in the short term, the market will continue to prosper due to underlying structural factors.
“Right now we are in for a world of pessimism – or at best, uncertainty,” he said.
“GDP is strong, such that the RBA is likely to raise next week. And an oil shock will have an impact too. The deputy governor gave an impromptu interview yesterday probably to give the country a ‘heads up’ that a rise is coming.
“Short-term advice to my clients is that property markets will go sideways, due to rate rises and consequent drop in confidence.
“Long-term, people are still moving to Australia and we are still not building enough properties for the country’s needs. The market will hold up.”
Why the swing?
NAB has shifted to forecasting two rate hikes in March and May after reassessing the inflation risks emerging from the Middle East conflict and recent messaging from the Reserve Bank.
The bank said increasingly hawkish commentary from the RBA’s governor and deputy governor suggests policymakers view the conflict-driven oil price surge as an inflationary shock.
Combined with already elevated inflation, strong economic growth, and a tight labour market, NAB believes the RBA will act quickly to avoid falling behind the curve and to preserve credibility as inflation expectations rise.
Similarly, Westpac has also moved to a double-hike scenario, saying that while higher oil prices may only temporarily lift headline inflation, the RBA is likely to respond to prevent inflation expectations from becoming entrenched.
Chief economist Luci Ellis said recent RBA communication suggests the central bank remains concerned about weak supply capacity and is prepared to act pre-emptively to keep inflation expectations anchored, particularly given that financial markets and consumer confidence have so far remained resilient.
The Commonwealth Bank of Australia also noted that the RBA have in the past favoured moving at meetings where staff forecasts are refreshed.
It said: ”[With] the world and inflation outlook moving rapidly there may be a preference to wait. But high frequency consumer inflation expectations are moving north and with an economy already running above capacity and inflation too high, this would be a concern for the board.
“The debate will be lively, as it should be, ultimately we expect the RBA to focus on inflation and lift the cash rate in both March and May to take the cash rate to 4.35 per cent,” it said.
”We will update the impacts on Australia from the Middle East conflict and higher rate expectations in due course.”
While thre of the big four banks now expect back-to-back hikes, ANZ remains more cautious. The banks currently forecast a single rate increase in May, reflecting the view that the RBA may wait for additional data before tightening policy further.
ANZ only recently shifted away from expecting an extended pause, highlighting the growing uncertainty facing policymakers as global shocks begin to feed into the inflation outlook.