ANZ predicts 40-bp cash rate hike for June

Previously, the major bank had forecast a 25-bp increase for the cash rate in June, but it has pivoted to predicting the Reserve Bank of Australia will opt for a 40-bp lift at its monetary policy meeting on Tuesday (7 June).

Following its May monetary policy meeting, the RBA revealed that it had considered a 40-bp increase, to combat surging inflation, instead of the 25-bp rise it went with.

As ANZ senior economist Felicity Emmett has written in a new research note, the latest gross domestic product (GDP) and business indicators data from the Australian Bureau of Statistics (ABS) have signalled that average hourly wages growth is climbing at a stronger rate than expected.

The analysis also noted that the household consumption deflator (the broadest metric for consumer inflation) has had its highest quarterly increase since 1990, outside the September 2000 spike that was brought on by the GST (goods and services tax).

The household consumption deflator was up by 1.5 per cent over the quarter and up by 3.2 per cent over the year, the strongest annual growth since 2008.

“This suggests to us that policy needs to lean more strongly against the broadening of inflation pressures,” the ANZ report said.

“As such, we think the strength of the price and wage measures in the GDP data should be enough to convince [Reserve Bank of Australia] governor Lowe that ‘there is a very strong argument’ to deviate from a regular 25bp move and get the cash rate a little higher a little bit faster.”

Westpac recently reaffirmed its 40-bp rise forecast for June, which would see the cash rate increase from its current 0.35 per cent up to 0.75 per cent.

The big four bank’s chief economist Bill Evans had also referred to the Reserve Bank assessing wage pressures beyond the wage price index (WPI).

In the March quarter, the WPI rose by 0.7 per cent, slightly lifting its annual growth rate to 2.4 per cent – compared to the previous 2.3 per cent.

But the RBA has referred to its own business liaison, which indicated a number of companies were considering pay rises for their staff as high as 3 or 4 per cent.

The more recent GDP data showed household disposable income rose by a modest 0.6 per cent over the March quarter, with wages up by 1.8 per cent.

But ANZ has calculated that non-farm average earnings per hour rose by 2.7 per cent during the March quarter, up 5.3 per cent year-on-year – compared to the 3.3 per cent annual growth captured in the previous quarter.

“While there’s a possibility that this outcome overstates the acceleration in wages a little, it’s clear that broader measures of labour costs are accelerating at a rapid rate,” Ms Emmett wrote in the ANZ research note.

But the report also noted that during the first quarter, the omicron surge resulted in a drop in hours worked, with many workers receiving sick leave, inflating their earnings per hour worked.

“While it’s difficult to disentangle this impact, it is likely that the strong upward trend in this broad measure of labour costs remains intact,” the report added.

“We will get a cleaner read in Q2.”

The 5.3 per cent annual growth estimate is “well above” previous expectations from ANZ’s team and is tracking above the RBA’s forecast for wage growth.

The GDP rose by 0.8 per cent over the March quarter and was up by 3.3 per cent through the year, the ABS reported.

Growth had been driven by gains in household consumption (up by 1.5 per cent quarter-on-quarter), government spending (up 2.5 per cent) and inventories (up by 1 percentage point).

As growth in consumer spending outpaced growth in income, the household saving rate edged downwards from 13.4 per cent to 11.4 per cent. But the ANZ analysis noted savings are still fairly well elevated.

“While this is down from the peak of 24 per cent recorded in the June quarter last year, it’s still well above the 5 per cent levels seen in the pre-pandemic period,” the report said.

“Very large household bank deposits built up over the past year or so leave consumers in a very good position to continue to grow spending strongly through 2022.”

Business investment, which was up by 1.4 per cent over the quarter, had taken a sharper rise than suggested by partial indicators, while residential construction fell by 1.1 per cent and net exports were down by 1.7 percentage points.

Housing construction had been up-ended by heavy rain and flooding, the ANZ report said, with new building down 2.2 per cent, but renovations were up by 0.7 per cent.

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