In the wake of Tuesday’s federal budget, Westpac chief economist Bill Evans has hosed down the futures market’s latest prediction that the Reserve Bank of Australia will hike the cash rate to 3.5% by 2024:
The near term spending numbers in the Budget are certainly not sufficiently alarming to trigger a change in that approach by the RBA. The government’s Budget forecasts which point to inflation moving back within the 2–3% target band in 2023/24 appear consistent with the RBA’s own approach.
Indeed the June quarter Inflation Report which will print on July 27 is likely to show an actual reduction in annual inflation of around 0.5% as a result of the lower petrol prices. While financial markets remain convinced that the RBA will start lifting rates as early as the May meeting we remain comfortable with our own view that the patient approach from the RBA will see the first increase in August with a target terminal peak of 1.75% by end 2023. This compares with current market expectations of an extraordinary peak of around 3.5% in 2024.
Even skittish markets will struggle to see anything in the Budget that would encourage the prospect of higher rates…
With markets expecting a rate hike at every meeting from June along with a 40% chance of one in May the wording of the Governor’s Statement following the Board meeting will be watched very closely.
As discussed, we do not think there is anything in the Budget that could prompt the Board to begin the tightening cycle earlier than the August date we have advocated for some time…
It would seem unlikely to us that the Governor would choose to eliminate the sentence “The Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve”. following the April Board meeting…
To justify market pricing for the timing of the first move that “patient” approach really needs to be eliminated in the April Statement…
If, as we expect, the Governor retains “patient” then it will be a tough call for the market to maintain that the June rate hike is a certainty…
I agree 100% that the markets are delusional on interest rates. Hiking the cash rate to 3.5% (from 0.1% currently) would very likely crash the housing market and economy.
That said, I also think Westpac’s forecast peak in the cash rate to 1.75% is too high, since it would lift average mortgage repayments by 22%, equating to an extra $560 a month in repayments on the median priced Australian dwelling ($860 for the median Sydney buyer):
A 1.65% rise in interest rates would lift monthly mortgage repayments by 22%.
Because Australians are carrying so much mortgage debt and are so sensitive to interest rate rises, I am tipping a lower peak in the cash rate of around 1%.
