Interest rates to rise next year?

Commonwealth Bank has seconded Westpac’s predictions, forecasting that interest rates will rise well ahead of the RBA’s 2024 timeline.

Following Westpac’s detailed rate hike predictions, Commonwealth Bank has laid out its own forecast, which foresees a rate lift as soon as November 2022.

Strong labour market conditions and wage growth are expected to push the Reserve Bank of Australia to begin normalising monetary policy in late 2022 with a cash rate increase to 0.5 per cent, peaking at 1.25 per cent by Q3 2023.

In a statement published on Wednesday, CBA head of Australian economics, Gareth Aird, explained that the big four bank’s predictions have been at odds with the RBA’s “2024 at the earliest” forward guidance for months.

“Our message has been consistent and unswerving: the labour market will tighten quickly, and this means that wages and inflation will lift, particularly because the supply of labour is constrained,” Mr Aird said.

According to CBA, the Australian labour market has tightened “at a phenomenal pace”, yielding “very strong” forward-looking indicators of labour demand.

“There are scenarios that could see the RBA pull the rate hike trigger earlier than November 2022, particularly if they tweak their reaction function because it becomes irrefutable that wages growth is on a path to 3 per cent per annum – the rate of growth they have targeted.”

While CBA won’t discount the possibility that the RBA could pull the trigger earlier than November 2022, Westpac is quite confident the bank will wait until the first quarter of 2023 to make a move.

In fact, according to Westpac, “game-changing” employment figures will see the RBA lift the official cash rate by as much as 0.75 per cent by the end of 2023, starting with a 15 basis points increase in the first quarter.

“We now expect that the RBA will assess that it has achieved the conditions necessary for the first interest rate hike by the first quarter of 2023,” said Westpac’s chief economist, Bill Evans.

As for the economic preconditions that will push the RBA to act, Mr Evans said that “the recovery is now clearly in a self-sustaining upswing”.

“With the starting point for the unemployment rate now at 5.1 per cent, rather than the 5.5 per cent we had previously expected for May 2021, we now forecast that the unemployment rate will reach 4.0 per cent by June 2022 and will drift down through the second half of 2022 to reach 3.8 per cent by year’s end,” he concluded.

Similarly, given the starting point for the labour market and the forward-looking measures of labour demand, CBA now forecasts the unemployment rate to be 4.5 per cent at end-2021 and 4.0 per cent by end-2022.

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Reproduced from nestegg

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