ANZ and Westpac have opposing views
In the wake of the US bank collapses and a decrease in the monthly consumer price index indicator, bank economists are divided on whether the RBA is likely to hit the pause button on interest rates when the board meets on April 4.
ANZ Bank is forecasting a rise in the official cash rate while Westpac Group anticipates a pause.
The official cash rate, currently sitting at 3.6%, is set to be reviewed on Tuesday. It has risen 10 times since May 2022, a total of 335 basis points, in an effort to bring inflation down.
The Reserve Bank of Australia said in March that the monthly CPI indicator suggested inflation had peaked in Australia. Fresh inflation figures have since been released, with monthly ABS data released on Thursday showing a decline from 7.4% to 6.8% in the year to February.
ANZ senior economist Adelaide Timbrell (pictured above left) told MPA on Thursday that the bank was forecasting two further rate rises in April and May.
“We forecast that the RBA will raise the cash rate by 25bp in April, and then again by 25bp in May, to reach a peak cash rate of 4.1%,” Timbrell said.
ANZ’s forecast is in contrast to that of Westpac Group economist Jameson Coombs (pictured above centre) who confirmed to MPA that the bank had predicted a pause in April, leaving the cash rate at 3.6%.
“We have a final rate hike of 25 basis points pencilled in for the May meeting and expect this will be the last in the cycle leaving the peak in the cash rate at 3.85%,” Coombs said. “However, recent inflation data suggests there is downside risk to this forecast and there is a possibility the cash rate could peak at 3.60%,” he said.
Inflation has peaked but not yet been tamed
In a Quick Reaction Australia report released on Thursday, ANZ senior economist Felicity Emmett (pictured above right) and senior economist Catherine Birch said the monthly CPI indicator (6.8%) showed inflation momentum remained “strong”, noting that inflation was not slowing as much as the fall would suggest.
They noted that the seasonally adjusted result of 0.6% was above 7% on an annualised basis, while the three-month inflation average was around 2%, pointing to “strong ongoing momentum”.
Categories where inflation was particularly strong included education and fuel (each up 5.6% year-on-year in February) and electricity (up 17.2% year-on-year).
Other data likely to guide the RBA’s April decision included recent labour force figures, showing a large bounce in employment (64,600 jobs created in February) and a drop in the unemployment rate to 3.5% following 3.7% in January.
Business conditions remained strong, and price and cost growth remained elevated, companies continuing to report a tight labour market, ANZ economists said. Retail sales grew 0.2% month-on-month, but services spending captured in the data remained solid, they said.
US bank collapses don’t deter central banks
Despite Australian banks being considered well-capitalised and well-diversified with different regulatory frameworks to their US counterparts, the collapses of Silicon Valley Bank and Signature Bank have created widespread concern.
The Federal Reserve pressed forward with a further 25-basis-point hike in March, taking the federal funds rate from near zero in March 2022, to a range of 4.75% to 5%.
ANZ economists said that the recent banking sector issues had seemingly been “ringfenced” by quick action from central banks, acknowledging the European Central Bank, the Bank of England and Swiss National Bank had also raised interest rates over the past few weeks.
This signalled that financial stability concerns were “not outweighing ongoing inflationary concerns”, they said.
ANZ economists also noted further inflationary pressure ahead on the wages front, with incoming NSW Premier-Elect Chris Minns having promised to remove the 3% wage cap for public sector workers, and federal Workplace Relations Minister Tony Burke essentially backing another inflation-linked increase in the minimum wage this year.
“While the RBA has signalled its intention to pause at some point in coming months, we continue to think that the data is not yet consistent with a pause,” ANZ economists said.
A tipping point for borrowers?
Timbrell said ANZ was forecasting the official cash rate to peak at 4.1% in May and that the first rate cut was unlikely to occur before quarter four, 2024.
Some economists have suggested that a 4% cash rate would be the tipping point for more indebted mortgage borrowers, noting that the 3% loan serviceability buffer imposed by APRA had been exceeded by recent rate hikes. SQM research founder Louis Christopher told the Sydney Morning Herald in March that stubborn inflation and a 4% cash rate had “a real chance of destabilising the economy” and “distressed property sales”, an opinion he said was formed through talking to predominantly non-bank lenders about the financial positions of clients.
Timbrell said the bank did not forecast a widespread financial stability issue among Australian households. However, the bank noted that mortgage stress was likely to rise along with interest rate rises.
“Households with owner-occupier debt, on average, have strong savings buffers and a good deal of liquid assets to fall back on if their wages don’t keep up with mortgage payments and other essentials,” Timbrell said.
“Mortgage distress is likely to increase as rates rise, but we see more of a small, gradual increase from very low levels (and don’t see a ‘tipping point’),” Emmett said.
Coombs noted that mortgage stress is a continuum, where the higher rates go, the larger the likely incidence of mortgage stress among some households. RBA Financial Stability Review (October 2022) analysis showed that around 15% of variable rate mortgage borrowers would need to draw on their savings (or increase their incomes, possibly through taking a second job) in order to meet their minimum repayments, after accounting for non-discretionary spending, he said.
“This analysis suggests we are likely to start seeing some increases in mortgage stress, albeit from an extraordinarily low level,” Coombs said.
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