Westpac is the most bullish, revealing on Wednesday its calculations put the policy rate at 1.75 per cent by year’s end following a 40-bps hike in June and then more moderate 25-bps lifts in July, August, October and November.
“We are not convinced that the next move will be 25 basis points,” said chief economist Bill Evans.
“A larger increase in the cash rate than 25 basis points is likely to be seen by the board as necessary to convince agents that it is serious about the challenge and to accelerate the unwinding of the emergency measures that saw 65 basis points of rate cuts in 2020,” he explained.
Conversely, NAB and the Commonwealth Bank are tipping rates to hit 1.35 per cent by the end of the year, as a result of four equal 25-bps lifts.
ANZ, on the other hand, is putting its money on a 1.5 per cent cash rate in December.
And while governor Philip Lowe refused to be drawn on the appropriateness of market pricing in his post meeting briefing on Tuesday, he did point to 2.5 per cent as ‘not unreasonable’ for rates to return to over time.
This, NAB’s economist Taylor Nugent said, suggested he has something more gradual in mind, even as the path forward depends on the data flow.
Looking further forward, Mr Evans disagreed with the board’s base case and the market’s expectation that the tightening cycle will extend into the second half of 2023.
“In the early stages it is “safer” to move at a faster pace than in later stages when the build-up in rates will start to impact households,” said Mr Evans.
“We think that can be achieved with a terminal rate of 2.25 per cent which will be reached late in the first half of 2023.
“The high sensitivity of household balance sheets to rising rates will be the key constraint on the need for rates to move any higher,” he added.
And while the peak in RBA cash rate pricing is currently 3.5 per cent in twelve to 18 months’ time, chiming in on the forecasting game, Tim van Klaveren, head of Australian Fixed Income at UBS Asset Management, predicted that the RBA is likely to top out closer to 2 per cent.
“Whereas this level might be appropriate for the US economy, it looks too high for Australia,” Mr van Klaveren said.
“Central to our thesis is the more heavily levered Australian household. We would expect the hit to discretionary consumption to be significant from even a 200-basis point increase in mortgage rates when set on top of higher essential living costs such as petrol, food and energy,” he explained, adding that a deceleration in the global economy will add an extra layer of pressure on the RBA.
The RBA lifted rates by 25 bps on Tuesday as a result of inflation levels not seen since the introduction of the GST in 2001.
Last week, inflation spiked to its highest level in over two decades and while a blow out was predicted, economists didn’t quite expect such a sizable jump in both the headline and underlying inflation.
In Tuesday’s statement, the RBA upped its inflation forecast for 2022, predicting headline inflation of around 6 per cent and underlying inflation of around 4.75 per cent. These are up from 3.25 per cent and 2.75 per cent respectively.
By mid-2024, the bank is expecting headline and underlying inflation to moderate to around 3 per cent.
Maja Garaca Djurdjevic
Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.
