The Reserve Bank of Australia (RBA) is set to action three consecutive hikes to the cash rate over the coming months to combat “intense” inflation, according to ANZ Research.
ANZ Research revealed it now expects the official cash rate to peak at 4.1% by May, up from its previous projection of a terminal rate of 3.85%.
According to the research group, the revision reflects slower than anticipated progress towards the RBA’s inflation target of 2%-3%.
“Nearly 70% of mortgage debt has already been impacted by higher variable rates, and to date there is little evidence of a material impact on overall spending,” the group noted.
“Persistence in inflation pressures suggests that the cash rate will remain in restrictive territory for some time.”
As such, ANZ Research is projecting three consecutive 25bps hikes in March, April and May to combat “intense” inflationary pressures, reflected in annualised CPI inflation of 7.8% over the fourth quarter of the 2022 calendar year (Q422).
“Recent data suggest that both inflationary pressures are stronger and activity more resilient than we expected,” the group stated.
“A higher terminal rate of 4.1% looks likely to be required to bring inflation back down towards the target band over the forecast period.
Moreover, the group does not expect the RBA to ease monetary policy until November 2024.
“Given that price pressures are intense and look to remain stronger for longer, we have lifted our 2023 inflation and wage growth forecasts and see the higher cash rate as necessary to return inflation to the top of the target band by late-2024,” ANZ Research stated.
But according to AMP Capital chief economist Shane Oliver, rate cuts were “still on the cards” for either late 2023 or early 2024.
He acknowledged the RBA would need to see further evidence of an easing in inflationary pressures before adjusting its monetary policy strategy, but said recent indicators in the United States suggest Australia may make quicker progress toward the inflation target.
“If you look at the United States, their inflation rate has fallen by a third — from its high of 9.1 per cent to 6.4 per cent — and the indicators we have suggest it is likely to fall further,” he said.
“Australia is lagging the US by about six months, so I think we will see quite a sharp pull in inflation this year.
“That will enable the Reserve Bank to start cutting either later in the year or more likely, earlier in the new year.”
However, rates are unlikely to return to previous lows, unless the economy slips into a “really deep” recession.
“But if it’s a mild recession or just a slowdown, then the rate cuts that we see will just reverse a fraction of the hikes we’ve seen,” he added.
The RBA’s next monetary policy board meeting is scheduled for Tuesday, 7 March.
