ANZ predicts that the RBA will tighten the cash rate in two steps over the second half of 2023.
In fact, the ANZ research points out that with its forecasted wage growth of 3% and forecasted inflation above 2%, it “would not be out of the question that the RBA could tighten earlier than the second half of 2023”.
Inflation and wage growth increase before 2023
Cash rates are currently at a historic low of 0.1% and it has not been as high as 0.5% since the very start of the pandemic in March 2020.
Australia’s cash rate since 2000
The RBA has said, however, it wants to be confident in inflation being sustained above 2% before it raises interest rates for the first time, hence our expectation of the first move not occurring until the second half of 2023,” ANZ says in its research paper.
If wages growth remains at or above 3% for a couple of quarters, in the face of an expanding pool of workers, then we think the RBA will be confident enough of the outlook to increase the cash rate. This would be the first-rate hike since 2010.”
But it’s important to note that a cash rate of 0.5% is still exceptionally low and will underpin a rate structure that has negative wholesale real interest rates for at least five years, or even longer depending on what is happening overseas, the research explains.
There is a risk the first-rate hike happens earlier than the projected second half of 2023.
If this is because of a more rapid decline in unemployment and a faster acceleration in wages growth, the policy choice for the RBA will be relatively straightforward,” ANZ says in the research.
A more challenging mix for the RBA will be if wage growth and inflation pick up quickly even if unemployment is higher than the RBA might currently expect.
In this case, the RBA would need to walk back from its belief that unemployment has to fall to the low 4s or even lower before wages growth (and inflation) picks up materially,” ANZ research suggests.
We also can’t rule out the first-rate hike being later than 2023. Covid has thrown up many surprises so far.”
Aside from predictions of a cash rate increase and higher wage growth and inflation, ANZ also tips GDP rises, a drop in unemployment, increased property prices, a construction surge, and a tighter labour market.
The speed of the post-COVID-19 recovery continues to surprise and, after recovering all of the COVID-19 related losses in GDP, the Australian economy is rapidly moving into an expansion phase, ANZ research explains.
Over the next couple of years, ongoing high levels of monetary and fiscal stimulus are expected to support a robust recovery.
Consequently, ANZ research has upgraded its forecast outlook to a 5% rise in GDP through 2021, and 3.5% in 2022.
Growth in GDP per capita to stay well above trend
With population growth much lower than usual these growth rates are substantially stronger than a trend,” ANZ research says.
With international borders assumed to be largely closed until mid-2022, we expect the population to grow just 0.2% through 2021, 0.5% through 2022, and 1.2% through 2023.
ANZ research also reveals that consumer spending has bounced back strongly, although it still remains below pre-pandemic levels.
Retail spending appears to have boomed, according to the data, but services spending has not yet recovered from the initial slump.
Services spending recovery outlook
But going forward, ANZ research expects services spending to continue to recover and that consumers will have plenty of money to spend according to elevated household savings.
This high saving rate and a sharp increase in household deposits up to $140 billion over the year to December) should all support further strength in spending over 2021.
Australia’s low mortgage rates continue to underpin very strong growth in property prices throughout the country.
ANZ research reveals that owner-occupiers have largely driven the increase but that growth in investor purchases has also gathered pace over recent months.
This suggests an increasingly speculative element in the price gains, ANZ research says.
House prices will rise further
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Ongoing strength in housing finance, elevated auction clearance rates, and continued low stock levels suggest housing prices will continue to rise solidly through 2021.
We are expecting gains of 15-20% across the capital cities, although this assumes a slowdown in the pace of monthly gains - something that is yet to materialise,” ANZ research says.
The sharp gains in wealth associated with rising house prices, as well as a rising stock market, will also underpin strength in consumer spending and housing construction, according to the research paper.
In fact, housing construction is already rebounding strongly thanks to the federal government’s HomeBuilder scheme combined with other support all at a time of low-interest rates.
Jump in building approvals point to strong growth
After rising nearly 90% from the low, ANZ research expects building approvals to drop over the coming months as the pipeline volume of existing construction work comes through.
Given the large volume of planned works, a slowdown in housing construction isn’t expected until the second half of 2022 when current projects have begun being completed.
Business investment has turned around, and ANZ research expects the strength to continue.
Equipment investment has been driving the recovery, boosted by the federal government’s temporary full expensing scheme.
Solid profit growth and strong demand are expected to be key underlying drivers of the investment recovery and on the whole, ANZ research says firms are reporting a very strong outlook for CAPEX spending.
Capital spending points to strong investment recovery
ANZ research forecasts the unemployment rate to drop sharply to 4.8% by Q4 of this year, before falling more gradually to 4.4% by the end of 2022 and 4.2% by the end of 2023.
The research also indicates that underemployment will continue its decline, after recently breaching the 8% threshold for the first time since mid-2014.
Unemployment will drop to 4.2% by late 2023
This will be driven by ongoing strength in labour demand growth, underpinned by broad-based economic growth.
Leading indicators are signaling a rapid improvement in the labour market. ANZ Job Ads rose 7.9% m/m in May to be up 39% on its pre-pandemic level, a 12.5-year high.
Job ads signal lower unemployment
ANZ research expects annual growth in the wage to rise to 2.5% by late 2021, up from 1.5%, before accelerating to 3.0% in late-2022 and then 3.1% throughout 2023.
Wage growth will get to 3%
Taking into account our inflation forecasts, this should see real wages growth rise to almost 1% y/y in H2 2022, which would be the strongest since early 2013.
In light of the stronger labour market outlook, ANZ research expects inflation will rise faster than previously expected to reach the RBA’s 2-3% target band by late-2022.
This would be the first time underlying inflation has been inside the target band since the end of 2015,” ANZ research says.
Inflation will return to the RBA’s target band next year
By 2021, ANZ research expects quarterly rates of underlying inflation to gradually rise as the pressure from accelerating wages is partially offset by an appreciating Australian dollar.
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The bands of uncertainty around our forecasts remain wider than usual.,” ANZ research says.
This is because it is possible that the conditions for a cash rate hike eventuate even earlier than expected if the rapid improvement in our economy continues.
But there is also the prospect that the recovery could be knocked off track by COVID-19 complications and that therefore the cash rate hike is delayed beyond expectation, the ANZ research also warns.