Economists from the Commonwealth Bank (CBA) have suggested that another larger than expected rate rise by the Reserve Bank (RBA) in June may result in unnecessary angst among households.
CBA issued the warning ahead of the release of the first quarter wage price index on Wednesday and April labour force data on Thursday, both of which are considered critical to the next interest rate decision.
According to the bank’s latest forecasts, wages are expected to have increased by 0.8 per cent during the first quarter for an annual rise of 2.5 per cent, while the unemployment rate is expected to have dipped to 3.9 per cent.
These forecasts align with CBA’s prediction of a 25-basis point rate rise in June.
However, the bank noted that a larger than anticipated lift in wages or a more significant fall in unemployment would increase the risk of a 40-basis point rise at the RBA’s next board meeting.
“Such a move could be justified by the RBA as the data would be stronger than their recently released forecasts and a 40-basis point hike would take the cash rate to 0.75 per cent; a more ‘orthodox’ rate,” said CBA head of Australian economics Gareth Aird.
“Notwithstanding, a rate hike of more than 25 basis points at the June board meeting would put unnecessary angst into a household sector that is already quite concerned about the economic outlook, in part because of the expectation of higher rates.”
In addition to the predicted lift of 25 basis points in June, CBA expects further hikes of 25 basis points in July, August and November that would bring the cash rate to 1.35 per cent by the end of the year.
Another rise of 25 basis points is forecasted for February next year, with the cash rate then expected to remain at 1.60 per cent throughout 2023.
“A rate hike larger than 25 basis points in June accelerates the RBA’s timeline of normalising the cash rate. But it risks putting undue angst into a household sector where consumer confidence is brittle,” said Mr Aird.
“Indeed consumer sentiment has never been this low at the beginning of an RBA tightening cycle – it is currently well below average levels while at the beginning of previous rate hike cycles confidence was well above average levels.
“Given RBA governor [Philip] Lowe flagged 25-basis point moves as ‘business as usual’ last week, anything larger than a 25-basis point rate hike at any particular monthly board meeting could genuinely alarm borrowers.”
Mr Aird argued that slightly stronger than anticipated outcomes on wages and unemployment this week should not be a cause for concern and be used to justify a lift of 40 basis points.
He also noted that the RBA’s May rate decision had caught almost every analyst off guard, taking the cash rate to an unconventional level of 0.35 per cent.
“A tightening cycle from here that is based on orthodox increases in the cash rate of 25 basis points (or even 50 basis points at a particular meeting) would see the cash rate target at any given point sitting at an ‘unorthodox’ level,” he explained.
“As such, markets will be aware that the RBA could deliver a 40-basis point hike at any particular meeting if the board sought to reset the cash rate target to a more conventional metric. Such a move would likely need a key piece (or pieces) of economic information to support the case for a larger than 25-basis point increase in the cash rate.”
