National Australia Bank said on Tuesday it now sees the cash rate peaking at 4.6 per cent, aligning its forecast with Westpac and ANZ that similarly pencilled in two more consecutive rate hikes last week.
In a note, NAB said: “We now see the cash rate rising to 4.6 per cent, and we expect it to remain well into restrictive territory until mid-2024 when the RBA begins to ease back towards neutral”.
The big four bank explained that increases are likely at the July and August meetings on the back of stubbornly high inflation.
On inflation, we continue to see a moderation to around 4 per cent by end 2023 and 3 per cent by end 2024. But the risks are to the upside,” NAB said.
But the bank warned that as policymakers move rates higher, trying to calibrate policy amid elevated uncertainties, the risks around growth continue to rise.
“Recessionary forces are gathering, albeit this is still not our central case.”
Instead, NAB expects GDP growth of 0.5 per cent in 2023, followed by slightly higher growth of 0.9 per cent next year, before an eventually stronger rebound to 2.4 per cent in 2025.
The unemployment rate is expected to tick up slightly as the slowing in growth begins to dampen labour demand, moving to 4.2 per cent at the end of this year to 5.0 next year, and slightly down to 4.9 per cent at the end of 2025.
“In the near-term, the tightness in the labour market should continue to translate into stronger wage growth, with incomes at the lower end also supported by the very significant increase in the minimum and award wage rates for 2023 announced by the Fair Work Commission,” NAB said.
Last week, Westpac similarly revised its forecasts and pencilled in two 25 basis point hikes, one each in July and August, taking the terminal rate to 4.6 per cent.
“We now expect a further final increase in the cash rate of 0.25 per cent to 4.6 per cent at the August board meeting, for a peak in the cycle of 4.6 per cent,” the bank said.
It explained that the May labour force survey tipped the balance on its August call, after it revealed an increase in employment of 76,000, outstripping even the bank’s top-of-the range forecast for a 40,000 bounce.
“The stronger rebound means we now have average growth of 36,000 jobs over the two months — around the monthly pace we have seen over the past year, indicating no significant slowing of jobs growth despite the RBA’s 400 basis points of tightening over the same period,” Westpac said.
“The evidence of strong ongoing momentum in the labour market is sufficient to trigger the ‘considerable risk’ of an August rate hike in our central forecast.”
After recently revising its peak rate forecast from 4.1 per cent to 4.35 per cent earlier this month, ANZ last week acknowledged that it had changed its mind again and now expects a peak of 4.6 per cent.
Much like Westpac, ANZ said that in the wake of the strong May labour force survey, “we now look for the RBA to tighten by 25 bp in July and August”.
“That will take the cash rate to a peak of 4.60 per cent,” the big four bank said in its weekly update on 16 June.
ANZ assessed that despite the prospect of slower growth, “the key issue in Australia remains that inflation is too high”.
“As has been the case overseas, it has proven persistent and slow to respond to tighter monetary policy. We continue to think the RBA has more to do.”
“Returning inflation to the target band will need either a better productivity performance than the trend evident immediately prior to COVID or lower wages growth,” ANZ continued.
The bank noted that it sees wages growth lifting over the coming year and reaching a peak of 4.2 per cent mid-2024. A softer labour market, driven by ongoing weakness in GDP, is, however, expected to cap wages growth eventually.
“Productivity also tends to rise during periods of labour market weakness, which will ease unit labour costs growth. Still, the return of inflation to within the target band will be slow.”
Much like its peers, CBA has also acknowledged that the July board meeting “is live”, with the strong May labour force report tilting the decision to 50/50.
Noting that it previously favoured one final 25 basis point increase in August, CBA said it will firm up its call after the release of the monthly CPI indicator and retail data for May, but hinted that it is now leaning towards two more hikes.
The bank had called an end to the tightening cycle following the RBA May decision, which took the cash rate to 3.85 per cent.
The RBA’s June rate hike was widely unexpected, with the central bank’s minutes revealing on Tuesday that members did discuss two options — increasing the cash rate by 25 basis points or holding the cash rate unchanged.
“The case for raising the cash rate by a further 25 basis points focused on the increased risk that inflation would take longer to return to target than had been expected,” the minutes read.
“Members observed that inflation was already projected to be above target for a number of years and was expected to take somewhat longer to return to target in Australia than in some other countries”.
Economists have suggested that the RBA was also encouraged to lift rates following the Fair Work Commission’s decision to increase the minimum wage by 5.75 per cent. And in fact, according to the central bank’s minutes, the RBA board did express concern that wages across a broad range of jobs could become implicitly indexed to high inflation.
The likelihood that the increase in award wages would influence the RBA was assessed as high by AMP’s Shane Oliver prior to the June board meeting.
He told InvestorDaily at the time that the Fair Work’s decision and its implications for inflation would weigh on the RBA.
As such, the June rate hike has become the one that Australia likely did not need to have, with economists now warning that if the RBA continues its hiking trajectory, a recession may be unavoidable.
Much like the CBA, Dr Oliver has placed the odds of a recession at 50 per cent.
“The narrow path the RBA refers to is now likely very narrow with a high risk we get knocked off it into a recession we don’t have to have,” Dr Oliver told InvestorDaily.
Similarly, Paul Bloxham, HSBC’s chief economist for Australia, said earlier this month that “the risk of a recession is now high”.
According to the Australian Bureau of Statistics’ (ABS) latest national accounts data, Australia’s GDP grew 0.2 per cent over the three months to 31 March 2023, down from 0.6 per cent (revised up) in the December quarter.
The March quarter result fell below market expectations of a 0.3 per cent increase.
In annual terms, GDP grew 2.3 per cent in the 12 months to March 2023, down from 2.8 per cent in the previous quarter and from 3.3 per cent in the previous corresponding period.
The government expects Australia’s GDP to slow to 1.5 per cent growth in 2023–24.
