Cash rate to rise to 0.5% by end-2023: ANZ

ANZ economists have predicted that the Reserve Bank of Australia (RBA) could increase the interest rate in two steps in the first half of 2023, to take the cash rate to 0.5 per cent by the end of 2023.

In ANZ’s Australian Economic Insight report, the economists have reasoned that the hikes could occur as the conditions the RBA has stipulated to warrant such a move are met, including sustained inflation above 2 per cent and wages growth above 3 per cent.

The RBA has stated that it would not increase the cash rate for at least three years or 2024, or until it meets its inflation and wage growth targets.

According to ANZ economists, a tighter labour market would drive wages growth and, ultimately, inflation higher, adding that they expect annual growth in the wage price index to tick up to 3 per cent in H2 2022, and hold a little above 3 per cent through 2023 even as the opening of borders increases labour supply.

The economists noted that the unemployment rate is expected to plummet to 4.8 per cent by the fourth quarter of 2021, then fall more gradually to 4.4 per cent by end-2022, and 4.2 per cent by end-2023.

They also said that the stronger wages growth forecast has underpinned their expectation that trimmed mean inflation would return to the RBA’s 2 per cent to 3 per cent target band by late-2022, and reach the mid-point of the target band by the end of 2023.

Commenting further, the ANZ economists said: “Our updated forecasts actually have wages growth at 3 per cent and inflation above 2 per cent by the end of 2022, so it is not out of the question that the RBA could tighten earlier than the second half of 2023.

“The RBA has said, however, it wants to be confident in inflation being sustained above 2 per cent before it raises interest rates for the first time – hence, our expectation of the first move not occurring until the second half of 2023.

“If wages growth remains at or above 3 per cent for a couple of quarters, in the face of an expanding pool of workers, then we think the RBA will be confident enough of the outlook to increase the cash rate. This would be the first rate hike since 2010.”

The economists noted, however, that the “bands of certainty” around their forecasts have remained wider than usual, stating the conditions for rate increases could arrive even earlier than H2 2023 if the recent rate of economic recovery continues.

However, it said that this recovery could be curtailed by the coronavirus pandemic, which would delay rate hikes.

Furthermore, there is a risk that the first rate hike occurs earlier than the projected H2 2023, the economists flagged.

It said: “If this is because of a more rapid decline in unemployment and a faster acceleration in wages growth, the policy choice for the RBA will be relatively straightforward.

“A more challenging mix for the RBA will be if wages growth and inflation pick up quickly, even if unemployment is higher than the RBA might currently expect. In this case, the RBA would need to walk back from its belief that unemployment has to fall to the low 4s or even lower before wages growth (and inflation) picks up materially.

“We also can’t rule out the first rate hike being later than 2023. COVID has thrown up many surprises so far.”

The RBA commenced its easing cycle in June 2019, and lowered the official cash rate to 0.5 per cent in March 2020, before announcing an emergency cash rate cut to 0.25 per cent in the same month in response to the economic fallout from the coronavirus pandemic.

It reduced the cash rate to the current new record low of 0.10 per cent in November 2020 and moved to broad quantitative easing.

House prices to rise by 15-20 per cent in 2021

Inflation has been predicted to rise further in 2022 by the ANZ economists as the impact of the HomeBuilder scheme diminishes. They added that the grant has effectively reduced prices for new homes and noted the significant impact of grant, with the “new dwelling purchase” measure accounting for 8.5 per cent of the consumer price index (CPI).

“HomeBuilder grants are only paid after construction of a new home has begun, thus the 12-month extension for the construction commencement will prolong the program’s negative impact on CPI through to late 2022,” the economists said.

“However, the impact on CPI will gradually decline as the share of new HomeBuilder construction commencements in a given quarter reduces.”

Furthermore, the major bank’s economists have predicted that house prices could rise by 15-20 per cent across the capital cities through 2021, amid ongoing strength in housing finance, strong auction clearance rates, and low stock in the property market.

However, they highlighted that this house price forecast has assumed a slowdown in the pace of monthly price gains, something that they said is yet to materialise.

“The sharp gains in wealth associated with rising house prices, as well as a rising stock market, will underpin strength in consumer spending and housing construction,” they said.

ANZ hikes longer-term fixed rates by up to 45 bps

ANZ has joined other lenders in increasing its longer-term fixed interest rates for owner-occupiers paying principal and interest with loan-to-value ratios (LVR) of 80 per cent.

The major bank has increased its five-year fixed breakfree package rates by 45 bps to 2.69 per cent per annum (3.30 per cent per annum comparison rate), and its four-year fixed breakfree package rates by 0.25 per cent to 2.49 per cent per annum (3.26 per cent per annum comparison rate).

At the same time, ANZ has slashed its shorter-term two-year fixed rate for investors by 10 bps to 1.94 per cent per annum (3.24 per cent per annum comparison rate).

ANZ’s longer-term rate increases have followed similar moves by CBA, NAB and Westpac Group, as well as ING.

[Related: Tighter lending policy due in 1H 2022: Westpac]

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.