ANZ Research has revealed it now expects the official cash rate to peak at 4.1 per cent by May, up from its previous projection of a terminal rate of 3.85 per cent.
According to the research group, the revision reflects slower-than-anticipated progress towards the Reserve Bank of Australia’s (RBA) inflation target of 2 to 3 per cent.
“Nearly 70 per cent of mortgage debt has already been impacted by higher variable rates, and to date, there is little evidence of a material impact on overall spending,” the group noted.
“Persistence in inflation pressures suggests that the cash rate will remain in restrictive territory for some time.”
As such, ANZ Research is projecting three consecutive 25 basis point hikes in March, April and May to combat “intense” inflationary pressures, reflected in annualised consumer price index (CPI) inflation of 7.8 per cent over the fourth quarter of the 2022 calendar year (4Q22).
“Recent data suggest that both inflationary pressures are stronger and activity more resilient than we expected,” the group stated.
“A higher terminal rate of 4.1 per cent looks likely to be required to bring inflation back down towards the target band over the forecast period.
Moreover, the group does not expect the RBA to ease monetary policy until November 2024.
“Given that price pressures are intense and look to remain stronger for longer, we have lifted our 2023 inflation and wage growth forecasts and see the higher cash rate as necessary to return inflation to the top of the target band by late-2024,” ANZ Research stated.
But according to AMP Capital chief economist Shane Oliver, rate cuts are “still on the cards” for either late 2023 or early 2024.
He acknowledged the RBA would need to see further evidence of an easing in inflationary pressures before adjusting its monetary policy strategy, but he said recent indicators in the United States suggest Australia may make quicker progress towards the inflation target.
“If you look at the United States, their inflation rate has fallen by a third — from its high of 9.1 per cent to 6.4 per cent — and the indicators we have suggest it is likely to fall further,” he told InvestorDaily.
“Australia is lagging the US by about six months, so I think we will see quite a sharp pull in inflation this year.
“That will enable the Reserve Bank to start cutting either later in the year or, more likely, earlier in the new year.”
However, rates are unlikely to return to previous lows, unless the economy slips into a “really deep” recession.
“But if it’s a mild recession or just a slowdown, then the rate cuts that we see will just reverse a fraction of the hikes we’ve seen,” he added.
The RBA’s next monetary policy board meeting is scheduled for Tuesday, 7 March.
