The Reserve Bank (RBA) will not begin reducing interest rates until November 2024, according to economists at ANZ, who previously predicted the first cut would take place in August 2024.
This change is due to the challenges of inflation and wage growth, with both expected to remain higher for longer, according to ANZ’s head of Australian economics David Plank and senior economist Catherine Birch.
However, they continue to expect the cash rate to peak at 3.85 per cent, with hikes of 25 basis points set to be delivered next month and in February, March and May of next year.
“By mid-2023 we think there will be clear evidence that labour market pressures are easing, such as job vacancies falling more quickly, despite unemployment remaining below 3.5 per cent,” said Mr Plank and Ms Birch.
“At the same time, the expected sharp decline in headline inflation will give the RBA some breathing room regarding inflation expectations. This creates the opportunity for an extended pause, which will morph into a complete stop if the economy tracks the way we expect.”
Wage growth is now forecast to peak at 4.3 per cent in late 2023, up from an earlier prediction growth of 3.9 per cent, and remain at or above 4.0 per cent throughout 2024.
As a result, headline inflation is set to run slightly higher than ANZ had outlined previously, sitting at 3.0 per cent annually at the end of 2024 rather than 2.8 per cent.
“But we still see headline inflation slowing quite sharply next year, largely reflecting easing global and supply-side pressures,” Mr Plank and Ms Birch added.
“Trimmed mean inflation, on the other hand, will be a lot stickier than the headline, reflecting the momentum in domestic pressures including wage growth.”
Due to these updated forecasts, the cash rate is expected to finish 2024 at 3.6 per cent rather than 3.35 per cent as ANZ previously expected. Nevertheless, the bank’s economists acknowledged that there are “considerable risks” to the policy outlook.
“If inflation and wages exceed our revised forecasts, then the RBA may feel it has little choice but to push the cash rate above 4 per cent. Such a move would increase the downside risks to the economic outlook,” they said.
“On the other hand, if wage growth is more subdued and/or household spending and the labour market deteriorate more quickly than we expect, this could allow the RBA to pause its tightening cycle earlier.”
Mr Plank and Ms Birch also noted that the RBA review may lead to a shift in the central bank’s reaction function, with implications for the level of the cash rate.
