Late last week, Westpac chief economist Bill Evans revised his call for the Reserve Bank’s cash rate, tipping hikes to begin in 2023 after the “stunning” fall in unemployment and signals from the US Federal Reserve that its policy normalisation will be brought forward.
He expects the RBA to begin with a 15 basis points increase in the first quarter of 2023, followed up by a 25 basis point hike in both the second and fourth quarters of that year, taking the cash rate to 75 basis – “in effect reversing the ‘emergency’ rate cuts in 2020” as COVID-19 wreaked havoc on economies around the world.
“The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly,” he wrote, just days after it was revealed the jobless rate had fallen to 5.1 per cent, below pre-COVID levels.
The move comes despite the RBA repeatedly suggesting it would not hike rates until 2024 “at the earliest”, once the labour market is sufficiently tight to be generating “materially higher” wages growth and inflation is sustainably within its 2-3 per cent target range.
However, Mr Evans, who has correctly forecast several monetary policy cycles in his long career, said the RBA may have some flexibility around its condition that wages growth will need to be sustainably above 3 per cent.
“The key conditions for raising rates are ‘actual inflation is sustainably within the 2-3 per cent target range’ and ‘return to full employment’ both of which we expect to be met by end 2022,” he said.
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