Major banks revise cash rate forecasts

Following on from the release of the Reserve Bank of Australia’s decision and statement on monetary policy on Tuesday (5 April), all four major bank economists have updated their predictions for when they expect the central bank to raise the official cash rate.

The revisions come following a change in the language used by RBA governor Philip Lowe in his monthly statement.

Notably, the statement removed the wording around the board being “patient”.

In its March 2022 statement, the RBA noted it was going to be “patient as it monitors how the various factors affecting inflation in Australia evolve”.

However, the economists flagged that the April statement outlined that the board said it would instead assess additional evidence on both inflation and the evolution of labour costs (along with “other incoming information”) over the coming months.

“[O]ver coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs. The board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target,” the RBA said in its monetary policy statement.”

As such, economists from ANZ, CBA, NAB and Westpac all now believe the cash rate will start to rise in June 2022.

This would mark the first rate hike by the RBA since 2010 – and is expected to be one of many in quick succession.

ANZ forecast

ANZ’s economic team revised its cash rate forecast, bringing forward the predicted start date for rate hikes from September to June.

According to ANZ’s forecasts, they expect the cash rate to reach 2.00 per cent by November 2023 and peak above 3.00 per cent, but only after 2023.

Economist David Plank noted: “We look for the RBA to tighten by 15bp in June (previously September) with follow-up 25bp rate hikes in July and August. We see another 25bp in November, which will take the cash rate target to 1 per cent by the end of 2022 (previously 0.75 per cent).

“From there we expect 25bp rate hikes in each quarter of 2023, taking the cash rate to 2 per cent at the end of 2023 (unchanged). 

“At that point we think the RBA will pause for an extended period, not least because by then the Fed will have tightened materially and the US and global economies may be showing signs of slowing. We still see the cash rate as eventually rising to 3 per cent or more, but not until some time after 2023.”

He added, however, that a May rate hike “should not be ruled out”, as a surge in core inflation in the Q1 CPI “could leave the RBA thinking it has little choice but to move”.

CBA forecast

Belinda Allen, senior economist at the Commonwealth Bank of Australia (CBA), said that the data that the RBA would likely be most interested in would be Q1 22 Consumer Price Index (due 27 April) and Q1 22 Wage Price Index data (due 18 May).

Ms Allen suggested that their base case remains the first rate hike in June to move from 0.10 per cent to 0.25 per cent, with the RBA to “pause at our view of the neutral cash rate of 1.25 per cent in Q1 2023”, which she acknowledged was “well below current market pricing”.

She added: “There does, however, remain some risk of an earlier rate hike in May. An even stronger Q1 22 CPI print could force the RBA’s hand. This is not our base case however. Especially given the timing of the Federal election.”

NAB forecast

Meanwhile, Tapas Strickland, director, economics at NAB, has said that the bank has updated its forecast, with the first cash rate hike starting in June (previously August).

“We conclude households are well placed to handle the first phase of tightening that we expect this year and next (taking the cash rate to around 1.5-1.75 per cent), but that a further move higher to 3 per cent or above over that timeframe as markets price is too aggressive and would place undue pressure on the household sector,” he wrote.

“While it is clear the household sector will be able to service a higher mortgage rate (especially given APRA’s minimum serviceability buffers), a rise in interest payments relative to income will have to be financed by a reduction in the savings rate, erosion of the stock of savings, and/or lower consumption than otherwise. The magnitude of the increase implied by higher rates looks too aggressive to us.”

Westpac forecast

Westpac, which had previously suggested rates would rise in August, is now predicting the cash rate to start rising in June with consecutive rate hikes in June (15 bps); July (25 bps); and August (25 bps). This would be followed by further hikes in October (25 bps) and November (25 bps) reaching 1.25 per cent by the end of the calendar year.

It believed the case rate would then sit around 2.00 per cent by June 2023 – much faster than previously forecast (previously 1.75 per cent by February 2024).

Westpac’s chief economist, Bill Evans, said the RBA governor had “surprised us on Tuesday with the Board’s decision to abandon its patient approach to monetary policy”.

“Reflecting the changed policy stance from the RBA Board following the April meeting we now expect a sequence of rate hikes covering most months in 2022, reaching a cash rate of 1.25 per cent by year’s end,” Mr Evans said. 

“Our previous profile for 2022 had hikes in August; October and December in 2022 but the changed labour market situation and what looks to be a more urgent approach from the Board signals an earlier beginning to the cycle and only one ‘break’ in the sequence to mark the unwinding of emergency cuts.”

While the lenders acknowledged that mortgage borrowers had been saving at record levels over the COVID-19 pandemic (with some bank estimates that borrowers are, on average, two years ahead on their mortgage repayments), Westpac noted that there “is a clear upside risk to the terminal cash rate if these buffers prove to be more substantial”.

“The RBA will also be mindful of the risks of over tightening into the buffers that eventually are worked through exposing households to damagingly high mortgage rates. But there will still be considerable sensitivity to the higher rates,” he added.

Under Westpac’s central scenario, the standard discounted variable rate for owner-occupiers will be around 5.5 per cent by mid-2023.

[Related: RBA bides time as inflation accelerates]