ANZ calls September cash rate lift

A note from ANZ Research head of Australian economics David Plank has outlined a new cash rate forecast from the bank, following the Reserve Bank of Australia’s (RBA) first monetary policy meeting for 2022.

ANZ’s economists now expect the RBA will start lifting the cash rate from September, stating the rate will reach 0.75 per cent by November, before it hits 2 per cent by the end of next year.

The cash rate is also expected to keep rising in 2024, but at a slower pace.

The ANZ team believes the rate could eventually peak above 3 per cent, but the later upticks are expected to be slower than the initial steps.

In its first rate decision for the year on Tuesday (1 February), the RBA decided to maintain the cash rate at its current record low of 0.1 per cent.

RBA governor Philip Lowe stated the board is “prepared to be patient” and will wait for wages growth to improve before it pushes up the rate, despite inflation rising at a much faster pace than previously expected.

The central bank has insisted on ensuring inflation is “sustainably” within its target range of 2 to 3 per cent, which Dr Lowe has said would require annual wages growth of at least 3 per cent.

The wage price index (WPI) is expected to increase by 2.75 per cent in 2022 and by 3 per cent over 2023.

The RBA’s stance was somewhat consistent with recent ANZ predictions, that the RBA would wait for wages growth to step up before raising the rate.

The central bank updated its underlying inflation forecast on Tuesday (1 February) as well, projecting that it will reach 3.25 per cent by mid-2022, before moderating to 2.75 per cent in 2023 as supply pressures ease.

However, Mr Plank from ANZ noted the governor’s commentary had removed a prior reference to a need for wages to be “materially higher”.

“This points to some flexibility in how it will interpret the wages data,” he wrote in the ANZ Research update.

“We think the RBA will get the confirmation it seems to want from wages with the publication of the Q2 Wage Price Index (WPI) in mid-August, paving the way for a September 2022 rate hike.

“With policy extremely stimulatory we think the RBA’s initial moves will be quite quick, especially when we consider that the effective cash rate will initially rise by less than the target.”

But, ANZ has not ruled out the possibility of wages growth shooting up faster than expected in the first quarter of 2022, which could lead to the RBA raising the rate sooner than September.

The RBA also expressed that it was watching for that possibility, with Dr Lowe’s statement saying a further pick-up in wages was expected, but there was uncertainty around its pace amid historically low levels of unemployment.

“The timing of these releases [of Q1 WPI and GDP data] in mid-May and 1 June respectively could open the way for a rate hike at the RBA Board’s 7 June meeting,” Mr Plank reflected.

Both Westpac and CBA recently predicted the first cash rate hike will be in August.

Westpac has tipped there will be an initial 15 basis point increase in August, before a further 25 basis point raise in October.

After an address on the year ahead from Dr Lowe on Wednesday (2 February), a note from CBA head of Australian economics Gareth Aird stated the bank remains “comfortable” with its forecast. 

“The RBA is prepared to be ‘patient’ before raising the cash rate although patience is not defined,” Mr Aird wrote.

[Related: Bond-buying end doesn’t mean immediate rate rise: RBA]