RBA decision looms
The official cash rate is forecast to rise again in June amid inflationary pressures and robust wage growth, ANZ economists say.
It comes as the official cash rate, currently 0.35%, rose 25-basis points in May, the first rise since November 2010.
The RBA decision followed a 5.1% rise in annual inflation – the biggest annual jump in almost 21 years, ABS data showed. The hike was delivered ahead of Wage Price Index data, showing wages grew by 0.7% over the March 2022 quarter (2.4% over the year).
Read more: Has rampant inflation pushed up interest rates?
Ahead of the RBA June meeting to be held on 7 June, ANZ research senior economist Adelaide Timbrell (pictured above left), told MPA that mortgage borrowers should brace themselves for more rate rises.
“We expect the RBA to raise the cash rate by 40 basis points in June,” Timbrell said.
The big four bank expects the official cash rate, currently 0.35%, to “exceed 2% by May 2023”, she said.
In the first three months of this year, GDP rose to an annual rate of 3.3% (0.8% over the March quarter), current ABS figures show. It marked the second quarter of growth within the economy, following a contraction in the September 2021 quarter.
At 0.8% growth quarter-on-quarter, March GDP was “in line with expectations” and details of the quarter one report were encouraging, Timbrell said.
“Growth was driven by solid gains in household consumption (up 1.5% quarter on quarter), government spending (up 2.5%) and inventories (up 1 percentage point),” Timbrell said. “Business investment (up 1.4%) rose more strongly than suggested by the partial indicators, while residential construction (down 1.0%) was weak and net exports took a massive 1.7 percentage point off growth”.
ANZ research senior economist Felicity Emmett (pictured above right) said the data showed that average hourly wages growth rose more than 5% in the year to March – much stronger than the 2.4% annual rise in the Wage Price Index.
“The Q1 GDP report has prompted us to look for the RBA to lift the cash rate by 40bp at the June meeting – previously we expected 25bp,” Emmett said.
Emmett said the bank’s wage growth estimate of 5.3% year-on-year was “well above” expectations from a few weeks ago.
The “household consumption deflator”, considered to be the broadest measure of consumer inflation, had the highest quarterly rise since 1990, outside of the GST period, Emmett said.
“This suggests to us that policy needs to lean more strongly against the broadening of inflation pressures. As such we think the strength of the price and wage measures in the GDP data should be enough to convince Governor Lowe that ‘there is a very strong argument’ to deviate from a regular 25bp move and get the cash rate a little higher a little bit faster.”
Timbrell said ANZ expected headline inflation to average 4% over 2022 and 3% in 2023. Although easing of global distributions will play a part, increases in the official cash rate will be key to reducing inflation, she said.
Following the May cash rate rise, lenders reacted swiftly, announcing variable mortgage rates would increase by the same amount.
Read more: Non-majors raise variable loan rates
The industry has since speculated on the likely effect on homeowners, many of whom are currently on lower fixed rate mortgages and due to roll off these over the next couple of years.
Bankwest March 2022 data showed over 90% of customers were ahead on their home loan repayments.
Having also run the numbers on their customers, CBA told MPA that one in two of its customers were more than three months’ ahead of their scheduled repayments, while Gateway Bank said over 40% of its borrowers had sufficient deposits to cover over 19 months of repayments.
The numbers supported RBA securitisation data, published in the Financial Stability Review – April 2022, which suggested the median excess payment buffer for owner-occupiers with a variable rate mortgage was around 21 months’ worth of scheduled repayments in 2022.
Although the incidence of household financial stress was low and declining, RBA noted in the report that among those households more exposed to rising inflation and interest rates, were those with low savings (liquidity buffers), and/or high debt.
The RBA will release its decision on the official cash rate on Tuesday afternoon.
