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On Wednesday (27 April), data from the Australian Bureau of Statistics (ABS) revealed the consumer price index (CPI) had grown by 2.1 per cent to March – taking annual inflation to 5.1 per cent.
The surge in inflation, which is the highest since the introduction of the GST in 2000, had been driven by rising costs for the construction of new homes and petrol.
The trimmed mean, which excludes extreme price rises and falls and is the RBA’s preferred measure of underlying inflation, rose by 1.4 per cent over the quarter (the strongest since 2008) and 3.7 per cent over the year to March.
The Reserve Bank of Australia (RBA) has previously signalled that it would only raise the cash rate from its current record low of 0.1 per cent when it was convinced that its target range of 2-3 per cent annual inflation could be sustained – which would require annual wages growth above 3 per cent.
Earlier in April, RBA governor Philip Lowe confirmed the ABS inflation data, alongside new figures for wages, would be key to determining the path of the cash rate.
The ABS is set to release its wage price index data on 18 May.
Many economists have previously forecast a series of cash rate increases would begin in June. But now, a number are now switching their tune upon seeing Australian inflation hit its highest peak in almost 22 years.
ANZ has brought forward its rate hike forecast to May, expecting the RBA to begin with a 15 basis point (bp) rise to 0.25 per cent, before further 25 bps upticks in June, July, August and September – taking the rate to 1.25 per cent. The rate is anticipated to end in 2022 at 1.5 per cent.
The bank has tipped that off the back of the gush in inflation, the cash rate will reach 2.25 per cent at a faster pace, expecting it will hit the mark by May 2023. But that is unlikely to be the end of the tightening cycle, ANZ’s economists have said, pointing to a potential to reach 3 per cent or higher.
“A cash rate target of 0.1 per cent is inappropriate against this backdrop,” the economic update from ANZ head of Australian economics David Plank, senior economist Adelaide Timbrell and junior economist Arindam Chakraborty stated.
“We don’t think the RBA needs to wait for more data on wages, given that its own liaison program indicates that ‘wages growth had continued to pick up in the March quarter’.”
Simon Bednar, chief executive of aggregator Finsure Group commented the RBA may prefer to delay increasing the cash rate until after the federal election and wages data presents itself, not wanting to “be seen to be influencing voter sentiment”.
But he has said the inflation surge may require action by next week at the RBA’s May monetary policy meeting.
“I believe the RBA may have no choice but to lift rates,” Mr Bednar said.
“The RBA has an obligation to ensure its monetary policies are appropriate for the time and unless it increases the rates next week it runs the risk of reacting too late. The consequences of moving slow might cause greater problems down the track and end up with higher rates longer term.”
The Finsure CEO has made a somewhat similar forecast to ANZ: the RBA will start with a 15 bp rise next week, taking the cash rate to 0.25 per cent, before two further increases for the year, following the release of additional economic data.
In this scenario, rates could reach at least 1 per cent by the end of the year – two years after the RBA lowered the cash rate to its current level.
NAB has also placed its bets on the RBA picking up the rate next week, with the first move tipped to be a 15 bp uptick, before further 25 bp increases in June, July, August and November – taking the cash rate to 1.25 per cent by the end of the year.
Westpac is also on team May, forecasting a 15 bp rise for next week, before a 25 bp increase in June – adjusting from its recent prediction of a 40 bp rise in June. However, the newer guess would still have the same result by June – with the rate to still wind up at 0.5 per cent.
Westpac chief economist Bill Evans wrote the surge in inflation “precludes the luxury of waiting for the additional information on the labour market”.
Previously, the Westpac team believed the RBA would have had the chance to prepare borrowers for a rise in May, before pulling the trigger on a sizeable 40 bp increase in June.
But, if it lifted the rate in May, “no careful preparation is possible; the move will come only a week after the guidance that the board intended to wait another month; and a jumbo first move would expose the risk of an excessive shock to confidence,” Mr Evans warned.
Westpac has tipped there will be further 25 bp moves in July, August, October and November, with the cash rate expected to hit 1.5 per cent by end of 2022. A further two 25 bp rises are expected in February and May of 2023, taking the rate to 2 per cent.
CBA sticks to June
However, others have given more cautious readings. CBA’s economists have retained their previous forecast, that the RBA board is likely to start normalising the cash rate from June.
A research note from Gareth Aird, CBA head of Australian economics; senior economist Belinda Allen and economist Stephen Wu referred to the RBA’s previous indications that it would wait for evidence around wages and employment.
“If the RBA lifts the cash rate at the May board meeting next week they will have reneged on what they said just last week – namely that the board agreed that it would take into account evidence on both inflation and the evolution of wages costs as it sets policy,” the CBA note stated.
“There was no need for the RBA to put this information in the April board minutes unless the board was committed to seeing upcoming data on labour costs before raising the cash rate.”
For the CBA team, the question is whether the RBA will decide, come June, to raise by 15 bps, bumping the rate to 0.25 per cent, or if it will crank it up by 40 bps, taking the rate to 0.5 per cent They have leaned towards an initial 15 bp rise, before a 25 bp increase in July.
“We think a 40bp increase in the cash rate first up would put unwanted angst into a household sector that was under the impression, until recently, that rates weren’t going up until ‘2024 at the earliest’,” the analysis said.
“Notwithstanding, the inflation data is now uncomfortably high and it looks a very close call between a 15 bp hike and a 40 bp hike at the June board meeting.”
Bluestone Home Loans consultant economist Andrew Wilson similarly believes rates will remain on hold over May, but the RBA’s meeting commentary and the incoming wages data will be “revealing”.
But he has also warned borrowers could be left in the lurch if wages aren’t rising in line with inflation.
“An increase in interest rates without appropriate wage increases will spell bad news for household budgets that are now confronting consecutive quarters of real wage declines approaching record low levels,” he said.
[Related: Inflation hits highest level in 22 years]
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