ANZ casts doubt on August cash rate hike

Although inflation has been recorded within the Reserve Bank of Australia’s (RBA) target band for two consecutive quarters, ANZ economists believe the central banks will not run faster to raise the cash rate.

Data from the Australian Bureau of Statistics (ABS) last week revealed the consumer price index (CPI) rose by 1.3 per cent in the December quarter and 3.5 per cent annually.

The annual trimmed mean for underlying inflation (which excludes extreme rises and falls) had grown to 2.6 per cent, up from 2.1 per cent in September. It was at its highest since 2014.

Inflation had now been within the RBA’s target range of 2 to 3 per cent for two quarters, which the central bank had set as a prerequisite before it would raise the cash rate from its current record low of 0.1 per cent.

Previously, the RBA had insisted it would be unlikely to raise the rate until its previously set forecast of 2024, as inflation wasn’t expected to hit 2.5 per cent until the end of 2023.

The RBA has also targeted wages growth of 3 per cent or higher, to ensure inflation is sustainably within the target band – with wages growth only anticipated to lift to 3 per cent in 2023.

But there has been speculation of a rate climb happening sooner, with Westpac last week predicting conditions will be ripe for a 15 basis point increase in August, before a further incline of 25 basis points in October.

A more recent research note from David Plank, ANZ Research head of Australian economics, market economist Hayden Dimes and senior economists Felicity Emmett, Catherine Birch and Adelaide Timbrell has begged to differ.

The ANZ team has argued the RBA board will wait until wages growth accelerates further, before lifting the cash rate.

“This will be a complicated message for a market that is priced for a rate hike by May and more than 100bp by year-end,” the analysts’ note, published on Friday (28 January) stated.

“But it will be a clear signal the RBA is serious about wanting to see sustainably faster wages growth before it moves.”

The ANZ analysis has explained that achieving 3 per cent wages growth “should satisfy the RBA that trimmed mean inflation can be maintained around the mid-point of the target band” and that the central bank would want wages to pick up before it dampens the demand side of the economy.

RBA governor Philip Lowe has previously been adamant that a rate hike is highly unlikely to unfold in 2022.

As such, the ANZ analysts have forecast the cash rate will remain at its current level of 0.1 per cent for the rest of the year.

But, they have predicted that in the first monthly monetary policy statement for the year, Dr Lowe will need to “admit for the first time… that a move in 2022 is a possibility if wages growth comes through faster than forecast”.

“This will likely reinforce the market’s belief a rate hike will happen this year,” the note stated.

The RBA is expected to bump up its forecasts for inflation in its February policy update, with ANZ anticipating a new central bank forecast of trimmed mean inflation to reach 3 per cent by mid-2022.

But as supply-side pressures ease, the RBA could project a decline in inflation over the last half of the year, with ANZ expecting a 2.75 per cent forecast for December before further slowing down in 2023.

The forecast for wages growth is also expected to pick up, with the RBA tipped to change its modelling to show it reaching 3 per cent annual growth by the end of 2022 (compared to the previous end of 2023 call).

Further, the ANZ economists have forecast that pending data will show residential building approvals declined in December, compared to the uptick recorded in November.

“Total building approvals are still higher than pre-COVID, but as of November were 30.1 per cent lower than the peak in April,” senior economist, Ms Timbrell, wrote.

“The increased popularity of working from home may support approvals in the short term, as could higher savings rates if the omicron variant continues to impact spending. But there are bigger risks to building approvals looking further out, in particular higher interest rates.”

New dwellings had copped one of the more significant price rises in the CPI, with a 4.2 per cent increase in prices.

ABS head of price statistics, Michelle Marquardt, commented: “Shortages of building supplies and labour, combined with continued strong demand for new dwellings, contributed to price increases for newly built houses, townhouses and apartments.”

The RBA is due to deliver its first monetary policy decision, for February, on Tuesday (1 February).

[Related: Former ANZ Trustees non-executive joins non-major banking group]

Sarah Simpkins is the news editor across Mortgage Business and The Adviser.

Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.

You can contact her on This email address is being protected from spambots. You need JavaScript enabled to view it..