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Major banks raise interest rate forecasts

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4 minute read

Two of the big four banks have predicted rates will go higher than previously expected.

Westpac and NAB have now both forecasted that the cash rate will reach a higher peak than economists at either bank had initially expected.

According to Westpac, the cash rate will reach 3.35 per cent by February next year, up from its earlier prediction of a peak of 2.6 per cent for the Reserve Bank’s (RBA) current tightening cycle.

This would be 85 basis points (bps) above the RBA board’s assessed neutral rate of 2.5 per cent and 135 bps above Westpac’s estimate of neutral.

“We think this higher terminal rate will reflect the board’s risk averse approach which will lead it to err on the side of ensuring inflationary expectations are contained so that inflation can return to the target range over the course of 2023,” said Westpac chief economist, Bill Evans.

The bank has forecasted rate hikes of 50 bps at the RBA’s meetings in August and September followed by lifts of 25 bps in October, November, December and February. 

“Just as the board overstimulated the economy in the face of the COVID threat, so it will be prepared to tighten to address what it perceives as the greater risk — losing control of inflation expectations at this time of rising inflation and very tight labour markets rather than fine tuning the economic downturn,” said Mr Evans.

Westpac expects that GDP growth will slow to 1 per cent in 2023 while the unemployment rate is set to increase from 3 per cent at the end of this year to 4.4 per cent next year.

“By early 2024, with inflation slowing back into the band; the economy operating below capacity; wages growth slowing and the unemployment rate rising, it will be time to move the policy setting back to neutral,” Mr Evans predicted.

“Over the course of 2024, we expect the cash rate to be reduced by 100 bps from 3.35 per cent to 2.35 per cent.”

Meanwhile, NAB has now forecasted that a peak of 2.85 per cent will be reached by the end of this year, which the bank considered to be “around neutral if not mildly restrictive”. 

It had earlier predicted that the cash rate would climb to 2.35 by the end of 2022 and then peak at 2.6 per cent in early 2023.

“The recent drop in the unemployment rate to 3.5 per cent is too large to ignore, particularly given the expectation that [the] Q2 CPI release will show further very elevated inflation,” the bank’s economists said.

While noting that it was difficult to predict the exact path to reaching 2.85 per cent, the bank said it had tentatively pencilled in hikes of 50 bps in August and September and 25 bps in October and November.

“A combination of below trend growth and inflation moving back to target over 2023 and into 2024, as in our forecasts, raises the possibility of rate cuts at some point in 2023 or 2024,” NAB suggested.

“With rates close to neutral, whether the RBA would feel the need to do so will in part depend on global developments and prospects, as well as domestic fiscal policy settings.”

ANZ also recently revised its rate predictions and has forecasted that four successive 50-bp rate hikes will take place throughout this year.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.