Peak rate to set new high for repayments, economist warns
The Reserve Bank of Australia is likely to hike the official cash rate a further two times over the current cycle, a Westpac senior economist says.
Westpac senior economist Pat Bustamante (pictured above) said that the bank had forecast a further 50 basis points of rate hikes this year.
“We’re expecting those hikes to occur quite quickly (i.e., in July and August), taking the terminal rate (peak rate) to 4.6% by August, once the Reserve Bank gets its quarter two CPI number,” Bustamante said.
Given this expected increase, coupled with a larger share of fixed rate mortgages rolling over onto higher variable rate mortgages, Bustamante said the bank expected the required repayments on home loans as a share of disposable income to rise “to their highest level on record” in 2024.
This was consistent with the RBA’s own expectation, he said.
RBA governor Philip Lowe said in June that further tightening “may be required” to ensure that inflation returns to target.
Bustamante told MPA that given economic pressures emerging over the next year, there was a risk that the eventual increase could be higher than Westpac’s forecast, noting that the Fair Work Commission outcome entitled around 30% of the Australian workforce to receive a 5.75% pay rise, effective from July 1.
There is a risk that that this becomes an anchor point going forward for wage negotiation, he said, noting that state governments were renegotiating enterprise agreements with their workforce.
If this becomes embedded in wage-setting processes, there is a risk that services inflation becomes “sticky,” he said.
“We think that the Reserve Bank will respond to that (they did in June) … we expect them to continue to hike to address that risk,” Bustamante said.
Before the Fair Work outcome was released publicly, Bustamante said that the RBA noted that it could not provide significant pay rises without productivity growth, noting that this would drive inflation.
“[RAB governor Philip Lowe] has got to respond to that and we think he will.”
Bustamante said that state governments were increasingly making cost of living adjustments for public services, such as a 4% pay rise in Queensland this financial year. If real wages go backwards, the top up would maintain real wages.
“That’s quasi-indexation of wages and that’s what leads to persistent inflation … that’s the risk that the Reserve Bank has been warning us from day one, and in our view, we think they’ll respond to that,” Bustamante said.
The monthly CPI indicator rose 5.6% in the year to May, representing a fall from 6.8% in April and 6.3% in March. AMP economist Shane Oliver told MPA on June 29 that receding inflation provided scope for the RBA to pause on Tuesday, the RBA having hiked the official cash rate by a total of 12 times, taking it to 4.10% in June but by yesterday Oliver said it was more likely that the Reserve Bank would opt for a 0.25% hike when the board meets today.
Bustamante told MPA that the May CPI result did not change Westpac’s forecast, noting that while the headline figure did come down, excluding volatile items (such as fuel and travel), CPI dropped marginally from 6.5% to 6.4%.
The month-on-month change actually accelerated, from 0.2% to 0.5%, he said.
“The harder part of getting inflation down is still quite sticky… we don’t think it will change the course for the Reserve Bank at this point in time,” Bustamante said.
Along with a revised peak official cash rate of 4.6%, Westpac has pushed out its forecast for the first rate cut, initially, forecast from the first quarter of 2024, now forecast for the second quarter, he said.
In a speech titled “Achieving Full Employment” to the Australian Industry Group in Newcastle on June 20, RBA deputy governor Michelle Bullock commented on the RBA’s full employment objective, indicating that the RBA would keep a close eye on the labour market.
“The Board has been willing to accept a somewhat more gradual return of inflation to target than many other central banks,” Bullock said.
“A faster return to target would likely mean more job losses in the short term. Our judgement is that if we can return inflation to target in a reasonable timeframe – while preserving as many of the employment gains as we can – that would be a better outcome,” she said.
The Reserve Bank of Australia will announce its decision on the official cash rate on Tuesday afternoon, July 3.