Mina Martin| Australian Broker| 7 February 2022
Economists remain adamant when it comes to predicting a cash rate increase this year, despite Reserve Bank of Australia’s latest economic forecast suggesting it might be some way off.
RBA’s quarterly statement on monetary policy predicted faster economic growth in the near term as well as a sharply rising inflation and an unemployment rate drop to below 4% by mid-2024.
RBA Governor Philip Lowe recently said the board is prepared to be patient as it watches how the various factors affecting inflation in Australia play out.
“We have sympathy for some patience from the RBA as it awaits further signs of labour market strength, but their implicit base case of 2023 looks a little complacent,” said Su-Lin Ong, RBC Capital Markets chief economist, told AAP.
More economists were speculating for a cash rate increase from the current record low of 0.1% – which would be a first increase in more than a decade – after the December quarter posted a stronger-than-expected inflation last month.
Financial markets are predicting an increase this year starting in May, while economists see a move more likely in August or September, with a further rise before the end of the year.
RBA has revised its inflation forecast up, with the interest-rate sensitive underlying rate to reach 3.25% by June this year and then level out at 2.75% until at least June 2024. RBA also said, however, that at 2.6%, underlying inflation has only just reached the midpoint of the target range for the first time in more than seven years, AAP reported.
“As the board has stated previously, it will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range,” RBA said in a statement. Though in an address to the National Press Club this week, Lowe conceded it was “plausible” that the central bank could lift the cash rate this year.
RBA expects the economy to have grown by 5% over 2021, rather than 3% as previously forecast. The central bank expects the economy to grow by 4.25% for 2022.
“Backed by the Morrison government economic plan, which kept businesses in business and Australians in jobs during the greatest economic shock since the Great Depression, Australia has outperformed every major advanced economy and is well on the road to recovery,” Treasurer Josh Frydneberg told AAP.
Annual wage growth is anticipated to have picked up to close to 2.5% by the end of 2021, compared with 2.2% as of the September quarter.
The December quarter wage price index will be released on Feb. 23.
Wage growth is expected to gradually strengthen further as the unemployment rate declines, reaching 3.25% by mid-2024, which would be the fastest pace since 2012.
“The RBA’s forecasts imply that if it was pressed to give calendar guidance for the first rate hike it would probably indicate the first half of 2023,” David Plank, ANZ head of Australian economics, told the publication. “We are earlier than this because we are more optimistic about wages growth.”
The unemployment rate is forecast to further fall to 4% by June, compared with its 13-year low of 4.2% currently. It is then expected to decline even further to 3.75%, cracking the 4% barrier for the first time in 50 years, AAP reported.