Several leading economists have brought forward their expectations for an interest rate hike, with some predicting the RBA will move as early as next year.
The Commonwealth Bank has become the latest lender to adjust its interest rate timeline, saying worker shortages cause by international border closures will continue to fast track the jobs recovery.
“Clearly the closure of the international border has accelerated the tightening in the labour market,” CBA economist Gareth Aird said.
The bank now expects two hikes in late 2022, and a further three in 2023 to take the official cash rate to 1.25%.
The Reserve Bank has held the official cash rate at a record low of 0.1% since November last year, where it’s expected to stay until wages growth and inflation are much higher. The RBA has repeatedly said it doesn’t expect that to occur until 2024 “at the earliest”.
But CBA predicts wages growth and inflation will rise enough to warrant a rate hike before the end of next year.
“The forward looking indicators of labour demand are very strong yet labour supply is constrained, which means the labour market will continue to tighten very quickly and wages growth will accelerate,” Mr Aird said.
He calculates non-resident worker numbers have fallen by 55% – or around 286,000 people – over the year to March.
“This helps to explain why job vacancies are so high despite employment, as measured by the monthly labour force survey, sitting comfortably above its pre-COVID high,” he said.
“Unprecedented fiscal and monetary policy stimulus has also turbo charged the economy and job creation.”
The federal government has flagged international borders will remain largely closed until mid-2022. CBA’s projections are based on net overseas immigration slowly increasing from then.
Growing chorus signalling early rate rise
The faster-than-expected jobs recovery has prompted several economists to change their interest rate projections, with Westpac calling the surprise drop in the May unemployment rate a ‘game changer’.
“The stunning fall in the unemployment rate from 5.5% to 5.1% in May, which aligns with other supportive data on the labour market, has substantially lowered our forecast profile of the unemployment rate,” Westpac chief economist Bill Evans said.
“Our analysis of the May employment report points to a convincing, sustainable improvement in the labour market. We do not assess this report as a “one off”,” he said.
Both Westpac and ANZ now expect the first interest rate hike to occur in 2023.
AMP Capital chief economist Shane Oliver is also forecasting 2023, but said conditions could be met sooner.
“In fact, it’s possible (covid permitting) that the conditions for higher rates (wages growth of 3% or more and inflation sustainably in the 2-3% target) may fall into place by late next year enabling a rate hike at the same time, although our base case remains 2023,” Mr Oliver said.
But REA Group economist Paul Ryan said it’s still too early to make that call.
“The reason why I think these rate calls are premature is because, while the labour market is performing really strongly, we haven’t seen that translate to wages growth yet,” Mr Ryan said.
Recent data from the Australian Bureau of Statistics showed wages grew by 1.5% in the year to March, which is still half the rate the RBA says is needed to boost inflation.
“The RBA is not going to increase rates until they see that actual inflation is sustainably within the 2-3% range,” Mr Ryan said.
“Based on their forecast they don’t expect that to happen until 2024,” he added.
The RBA will release updated economic forecasts in August, in its Statement of Monetary Policy.
Speaking at a business conference on Thursday, RBA assistant governor Luci Ellis said the central bank remained committed to keeping interest rates low for as long as is necessary to support the economic recovery.
“The pandemic is not over. Australia has seen a swift bounce back, but many other economies are still recovering or contending with outbreaks,” Ms Ellis said.
“The Board remains committed to maintaining highly supporting monetary conditions. The aim of these policy settings is to support a return to full employment and inflation consistent with the target.”
Banks positioning for higher interest rates
A growing number of lenders have moved to increase their longer-term, four- and five-year fixed rate mortgages in recent months, amid expectations interest rates will start to rise.
Last week, the Commonwealth Bank also lifted the ‘floor rate’ it uses on new loan applications to 5.25% from 5.10%.
Lenders are required to assess whether borrowers could still meet their repayments on an interest rate that is either 2.5% higher than their actual rate, or the ‘floor rate’ set by the bank, whichever is higher.
It comes as new home loan commitments hit a record high in April, with $31 billion of new loans approved during the month, according to the ABS.
Financial regulators last week sought assurances from Australia’s largest banks that they are managing risks within their home loan portfolios and not taking on riskier loans.
RateCity research director, Sally Tindall, said she expects other banks will revise their floor rates higher in the coming months.
“Families who overstretch themselves to get into an overheated property market, could end up in hot water when rates go up, especially if they haven’t had a decent pay rise in that time,” Ms Tindall said.
“Banks want to avoid this situation as much as customers do.”
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