Research this week from CBA flags when investors should be on the lookout for possible changes in the RBA’s interest rate forecasts.
“Probably by the end of 2021 or early 2022,” said Gareth Aird, the bank’s head of Australian economics.
So far this year, Australia’s central bank has been fairly unequivocal in its forward guidance; no rate hikes until 2024.
It follows on from the ‘seismic shift’ in policy settings last year, highlighted in a recent Stockhead interview with Perennial’s macro expert Dan Bosscher.
Instead of basing rate changes on inflation expectations, the RBA said it will need to see actual inflation rise above two per cent.
Just as importantly, it has to stay there before rate hikes come into play.
The rebound
Yet more proof of Australia’s economic rebound was in the qualitative data pudding this week as Westpac’s consumer confidence index surged to an 11-year high, with similar levels of optimism in NAB’s widely-read business confidence survey.
Aird reckons the unemployment rate will fall to 5pc by the end of this year (well down from CBA’s previous forecast of 5.5pc).
Jobs growth in March beat expectations (again) and the strength of the labour market rebound has “surprised the entire forecasting fraternity”, Aird said.
For the rates outlook, a pivotal question is how that translates into wage growth — viewed as a key prerequisite for inflation to rise.
RBA governor Philip Lowe reckons wage growth has to climb above 3pc first, and Aird doesn’t think it will get there anytime soon.
CBA’s forecast is for the Wage Price Index to climb to 2.2pc by the end of 2021, rising to 2.7pc by year-end 2022.
In turn, its 2021 target for underlying inflation is 1.9pc, climbing to 2.2pc next year.
Those forecasts “are consistent with the RBA leaving the cash rate on hold through to end-2022”, Aird said.
RBA interest rates — a 2024 thing?
Beyond that though is where it gets interesting.
Right now, the RBA’s view is that it won’t get the sustained rise inflation that it wants until 2024 “at the earliest”.
CBA’s crystal ball doesn’t extend as far as 2023 yet. However, extrapolating the trajectory of its forecasts for wage growth and inflation “challenges the RBA’s forward guidance”, Aird said.
And it’s most likely going to be a data story which becomes increasingly relevant towards the end of this year, he added.
Right now, almost every data update — employment, ISM surveys, consumer/business surveys, house prices — point to historically strong levels of trend growth.
If the trend line for CBA’s wages and inflation forecasts continue rising, the RBA “could not be confident” in its ‘2024 at the earliest’ projections, Aird said.
“We expect the RBA will eventually arrive at this conclusion, but not until the data forces their hand,” Aird said.
And that is most likely to be at the end of this year, or the start of next year.
The RBA’s 2024 “at the earliest” line is currently entrenched into the liquidity assumptions that factor into asset valuations.
In that context, even a consideration on the central bank’s part that rate increases may come before then has the potential to reverberate across asset classes.
Elsewhere, CBA expects the RBA to maintain its asset purchase (quantitative easing) program, but at a reduced rate.
Instead of $100bn of monthly bond purchases, Aird said he thinks the RBA will cut back to $50bn, as part of a new six-month QE program announced at the July board meeting.