About half an hour before mare Verry Elleegant stormed home to win yesterday’s Melbourne Cup, the outcome of another major event for the nation was unveiled.
But unlike the race that stops the nation, the results of the Reserve Bank’s hotly anticipated monthly meeting were about as expected.
The RBA opted to discontinue the yield curve target of 10 basis points for the April 2024 Australian government bond and excluded the reference that conditions for a hike in the cash rate were unlikely to be met “before 2024” from the statement.
In other words, the first rate hiking cycle in more than a decade will now likely kick off before then.
“(It’s) a good time to change those policies,” says Westpac chief economist Bill Evans.
“Yield curve targeting and setting a time frame for when the first rate hike would occur are unusually extreme policies.
“They’re appropriate for the emergency setting of 2020. But now that the economy is recovering, inflation is rising, it's no longer necessary to have those extreme policies.”
While expectations vary – financial markets are even pricing cash rate hikes to begin in 2022 – Mr Evans held firm his view that the RBA’s first move will be in February 2023, despite inflation fears stirring around the world as wages rise and supply chains remain impacted by the pandemic. He also thinks the market’s pricing of the peak in this cash rate cycle of around 1.8 per cent by the end of 2024 is “way too high” given the level of household indebtedness, expecting the cash rate to peak at 1.25 per cent.
He notes RBA Governor Philip Lowe this week again pushed back against the market’s pricing of hikes in 2022 more cautious view on wages growth in Australia relative to other countries.
But while the market may be overly “hawkish”, Mr Evans believes the RBA is being too cautious.
“The reason why we expect that rates will be rising before the implied expectations by the Reserve Bank Governor is that we see underlying inflation lifting to 2.8 per cent in 2022 and wages growth to 2.75 per cent, while we see the unemployment rate falling to 3.8 per cent.
“So we have a more upbeat outlook for the economy and for inflation, and as a result, we're expecting that the Reserve Bank forecasts are still too slow in terms of when we're likely to see the hike.”
Still, after several decades in the game, Evans knows better than most what will determine who is ultimately right.
“Now it becomes a forecasting game, and we think the Reserve Bank's forecasts are still too cautious. And that's why we have the first rate hike in the first quarter of 2023 compared to the implied forecasts around the RBA's new forecasts of late 2023.”
You can watch Bill’s full video analysis at Westpac IQ.
The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.