Bank predicts that runaway inflation will require a stronger response from the RBA
Wednesday’s GDP data has led ANZ economists to warn that next week’s interest rate hike will be far more severe than initially predicted, with ANZ now projecting that the Reserve Bank will raise rates by 40 basis points instead of 25.
ANZ said that the latest GDP data indicates that runaway inflation will require a strong response from the central bank at next week’s board meeting, The Australian reported. The bank predicts that the RBA will more than double the current cash rate of 0.35%, putting more pressure on borrowers.
Commonwealth Bank predicts another 25-basis-point hike on Tuesday, according to The Australian. The market is pricing 40 basis points, aligning with ANZ.
If ANZ’s prediction is accurate, the cash rate will rise to 0.75%, potentially adding an additional $111 to monthly repayments on a $500,000 loan.
ANZ said it changed its forecast due to first-quarter GDP data that showed an even bigger inflation problem for Australia than previously suspected, The Australian reported. National accounts showed a relatively solid economic performance, with quarterly growth of 0.8% driven by a spending surge despite the impacts of the Omicron variant, regional flooding and the Ukraine war.
However, ANZ said the data also showed signs that the RBA will have to take more drastic action to keep prices under control.
“While GDP was in line with our expectations, wages data showed that average non-farm hourly earnings rose more than 5 per cent over the past year,” ANZ said in a note. “This is well above our expectations from just a few weeks back and certainly much stronger than the signal from the Wage Price Index.”
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ANZ also said that the household consumption deflator, the broadest measure of consumer inflation, posted the highest quarterly increase since 1990.
“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,” ANZ said.
