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Westpac advances August mortgage rate hike

Westpac chief economist Bill Evans expects Australia’s central bank to begin its interest rate tightening cycle in August with a 15 basis point hike as strong job growth drives faster inflation.

The Reserve Bank of Australia will follow that up with another 25 basis point increase in October, Evans said in a research note on Thursday. He had already seen the RBA’s first hike in February next year.

Mr Evans forecasts five more RBA hikes from late 2022 through 2023 and 2024, a more aggressive schedule than his expectation of three rate hikes from the US Federal Reserve over the period.

The prediction contrasts with signals from Governor Philip Lowe, who has repeatedly said the likelihood of a rate hike in 2022 is close to zero, citing RBA forecasts that point to subdued wages and inflation until the end of 2023.

“We expect core inflation (trimmed average) to reach 2.4% in 2021 and decline to 2.6% in March 2022 and 2.9% in June 2022,” Evans said.

“This means that by the time of the August meeting, the board will have observed three consecutive quarters in which annual core inflation has met or exceeded its target (around the midpoint of the 2-3% range. ).”

It also raised its terminal rate estimate to 1.75% from 1.25% as the RBA will face “inflation/wage risks”.

Mr Evans cited the Australian Bureau of Statistics’ latest weekly payroll report which showed a 9% increase in total payroll in the year to December 19, with payroll rising by 3, 2% over the same period, which implies an increase of 5.6%. in average salaries.

The high-frequency measure is influenced by bonuses paid, hours worked and changes in the composition of the workforce, all of which are excluded from the wage price index.

“But the sharp increase in this measure of annual growth in recent months is certainly worth considering,” Evans said.

Australian labor force data, job vacancies and other official figures on consumer spending, credit growth and house prices all point to a rapid and sharp economic rebound in the last three months of 2021 after a virus-induced contraction in the third trimester.

The Omicron variant of the coronavirus which is spreading rapidly across Australia threatens to cloud the economic outlook, but Evans said he expects the hit to be temporary.

Westpac has lowered economic growth forecasts for the Australian economy by $2 trillion to 5.5% this year, from a previous estimate of 6.4%.

“We don’t see this correction as having a material impact on employment growth or wages/inflation,” Evans said.


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