More banks expect rate hike in both July and August

Last week, economists at both ANZ and the Commonwealth Bank of Australia (CBA), suggested that strong-than-expected employment figures could force the Reserve Bank of Australia’s (RBA) hand to further increase the cash rate from its current rate of 4.1 per cent, to 4.35 per cent in July and 4.60 per cent in August.

Westpac has now joined the fray by revising its economic forecasts for the coming six months.

After absorbing the labour force figures for May, which revealed that the unemployment rate in Australia decreased by 0.1 percentage point to 3.6 per cent (in seasonally adjusted terms), Westpac Group chief economist Bill Evans confirmed that the bank had now lifted its forecast for the cash rate peak to 4.6 per cent, up from its previous terminal rate forecast of 4.35 per cent.

Writing in an economic bulletin, Mr Evans explained that while the bank had previously thought there would be a 0.25 per cent increase in July and a potential risk of a follow-on move in August, he added: “The May Labour Force Survey tips the balance on our August call. It showed an increase in employment of 76,000, outstripping even our top-of-the-range forecast for a 40,000 bounce from a small decrease in April that looked to be mainly due to an Easter-related seasonal anomaly.

“The stronger rebound means we now have average growth of 36,000 jobs over the two months — around the monthly pace we have seen over the past year, indicating no significant slowing of jobs growth despite the RBA’s 400 bps of tightening over the same period.

“The evidence of strong ongoing momentum in the labour market is sufficient to trigger the “considerable risk” of an August rate hike in our central forecast.

“We now expect a further final increase in the cash rate of 0.25 per cent to 4.6 per cent at the August board meeting, for a peak in the cycle of 4.6 per cent.

“With the RBA’s rate increases from May, June, and (expected) July and August also being passed on, the average mortgage rate over the next year or so will rise by at least 150 bps — nearly 40 per cent of the current tightening cycle of 400 basis points.”

Given the protraction to the expected tightening cycle — and the low unemployment rate — Westpac has also now delayed its forecast for the easing cycle from February 2024 to May 2024.

“Next year, with labour markets remaining tight for longer than we expected back in March, the RBA board will require further convincing that the inflation path will land within the 2–3 per cent target zone by June 2025. They will have little choice but to hold off on the much-needed rate relief by three months,” he said.

“Accordingly, we now expect 25-bp rate cuts in May; August and November 2024 prior to further cuts in 2025 eventually bringing the cash rate below 3 per cent, our estimate of ‘neutral’, by year-end.”

Australia to avoid recession, but risks remain

The major bank has also lowered its economic forecasts to reflect the impact of the new peak cash rate.

Westpac had previously expected the year 2023 to result in 1 per cent economic growth, followed by a “tepid” 1.5 per cent growth in economic activity in 2024.

However, it has now downgraded its growth forecasts to 0.6 per cent in 2023 and 1.0 per cent in 2024.

The forecasts mean per capita spending recessions in both 2023 and 2024 of -1.5 per cent in 2023 followed by -1.0 per cent in 2024, Mr Evans said, also implies GDP per capita recessions of -1.2 per cent in 2023 and -0.6 per cent in 2024.

“The standard definition of a ‘technical recession’ is two consecutive negative quarters of GDP growth. Our forecasts now contain one negative quarter — the March quarter of 2024 (-0.2 per cent) while our forecasts for the adjacent quarters — December quarter 2023 (0.1 per cent) and June quarter 2024 (0.2 per cent) — are still positive although well within the range of forecast error,” Mr Evans said.

“Consequently, on this definition, we are not forecasting a technical recession but recognise the high degree of uncertainty.

“The significant change in the emphasis of priorities delivered by the [RBA] governor in his June decision statement — from staying on the ‘narrow path’ of protecting post-pandemic employment gains to containing inflationary expectations and worrying about rising unit labour costs — pointed to those further near-term rate increases.

“Our down-beat growth forecasts reflect that policy outlook. Given the notable resilience of the labour market to date; the prospect of adjustments to industrial relations arrangements that will add pressure to wages growth; and the lift to wage expectations from recent award wage decisions, we cannot dismiss prospects of even further increases in the cash rate.

“For now, we will bow to the prospect of ongoing tepid growth eventually containing these inflation pressures, expecting rates to go on hold beyond August. But we cannot entirely dismiss these risks and the inevitable implications for the state of the economy in 2024.”

[Related: June rate hike passed on by banks]