Westpac brings forward Australian rate liftoff

Cost woes: A pedestrian in a protective face mask walks past the illuminated Westpac logo in Sydney. It expects the interest rate tightening cycle to start in August. — Bloomberg

SYDNEY: Westpac Banking Corp chief economist Bill Evans expects Australia’s central bank will begin its interest rate tightening cycle in August with a 15 basis point hike, as strong jobs growth drives faster inflation.

The Reserve Bank of Australia (RBA) will follow that up with another 25 basis point increase in October, Evans said in a research note.

He had previously seen the RBA’s first hike in February next year.

Evans sees a further five hikes from the RBA from end-2022 through 2023 and 2024, a more aggressive timetable than his expectation of three rate rises from the United States Federal Reserve over the period.

The prediction contrasts with signals from governor Philip Lowe, who has repeatedly said the probability of a rate rise in 2022 was close to zero, citing RBA forecasts which point to subdued wages and inflation until late-2023.

“We expect that underlying inflation (trimmed mean) will reach 2.4% in 2021 and lift to 2.6% in March 2022 and 2.9% in June 2022,” Evans said.

“This will mean that by the time of the August meeting the board will have observed three consecutive quarters in which annual underlying inflation has achieved or exceeded its target (around the mid-point of the 2% to 3% range).”

He also raised his estimate for the terminal rate to 1.75% from 1.25%, as the RBA will need to address “inflation/wage risks.”

Evans cited the latest weekly payrolls report from the Australian Bureau of Statistics which showed a 9% lift in the total wage bill over the year to Dec 19, with payrolls rising 3.2% over the same period, implying a 5.6% jump in average wages.

The high-frequency measure is impacted by bonuses paid, hours worked and changes in the composition of the work force, all of which are excluded from the Wage Price Index.

“But the sharp increase in this annual growth measure in recent months certainly bears consideration,” Evans said.

Australian labour force data, job vacancies and other official numbers on consumer spending, credit growth and housing prices are all pointing to a quick and sharp economic rebound in the final three months of 2021 after a virus-induced contraction in the third quarter

The rapidly spreading Omicron variant of coronavirus sweeping across Australia does threaten to cloud the economic outlook, but Evans said he expects the hit will be temporary.

Westpac downgraded forecasts for economic growth in Australia’s US$1.5 trillion (RM4.5 trillion) economy to 5.5% this year, from a previous estimate of 6.4%.

“We do not see that correction as having a significant impact on jobs growth or wages/inflation,” Evans said.

Earlier, it had been reported that Australia’s consumer sentiment had dived this month as worries about the explosion in Omicron cases sent confidence to its lowest January level since 1992, according to the latest ANZ-Roy Morgan survey.

Consumer confidence fell 7.6%, sinking to its lowest rate since October 2020. Omicron case numbers are straining testing facilities and disrupting everything. — Bloomberg

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