Interest rates could be hiked up from as early as June this year, the head economist at Australia’s largest bank has forecast.
Head of Australian Economics at the Commonwealth Bank Gareth Aird yesterday revised his prediction for when the Reserve Bank of Australia (RBA) will lift rates from their current historic low level of 0.1 per cent.
Following larger than expected inflation data, Mr Aird said he now believes interest rates will be increased from August 2022, with some risk that it could be as early as June.
“The inflation data today means that we pull our call forward for the RBA to commence normalising the cash rate from November 2022 to August 2022. Our forecast today for the trimmed mean to increase by 0.9 per cent a quarter over Q4 21 was consistent with an earlier rate hike than our base case. But we thought on balance it was better to wait to see the data today before changing our RBA call,” Mr Aird write in a research note.
“Our expectation for the labour market to continue to tighten, for wages growth to accelerate and for underlying inflation to push towards the top of the RBA’s target band from here means the risk lies with an earlier hike than August 2022.”
The Commonwealth Bank is not alone in thinking rate hikes will come earlier than the RBA’s previous forecast of “late 2023 to early 2024”.
Two days ago, prior to the surprise inflation data, Westpac’s Chief Economist Bill Evans said he expects a rate hike to come at the board’s August 2 meeting where rates will be lifted from 0.10 per cent to 0.25 per cent.
For the average variable rate borrower with $500,000 owing on their mortgage, repayments could rise by $103 a month by the end of October if Westpac’s forecast is realised.
A lift in interest rates in August is unlikely to be the only time the cash rate is hiked in 2022.
Senior economist at AMP Australia Diana Mousina believes we are likely to see a second lift in September that will see interest rates climb to half a per cent.
“The price data reinforces our view that the fast increase in inflation will force the RBA to raise rates sooner than expected. We see the first rate hike starting in August 2022 with a follow-up rate hike in September with a pause for the rest of the year before another lift in early 2023,” said Ms Mousina.
“This means that the cash rate will end the year at 0.5 per cent.
“This is still very low and monetary conditions will remain loose. But it does mean more upwards pressure on variable mortgage rates, with fixed rates already starting to rise in recent months.”
If the RBA were to raise the cash rate to 0.5 per cent, it would largely bring rates back to where they were prior to the COVID-19 pandemic.
In September of 2019 interest rates were sitting at 1 per cent, having largely enjoyed periodic cuts from 2011.
However, with the onset of the pandemic and the need to ease the costs of lending and borrowing, several cuts were made. In March 2020 the rate was cut to 0.5 per cent, and then cut again just 16 days later in an emergency move to 0.25 per cent.
Finally in November 2020 it was cut to 0.1 per cent, a move that many say has spurned overwhelming demand in the property market, pushing the prices to new record highs.