Economists deeply divided over Reserve Bank’s likely interest rate trajectory – Michmutters

Economists deeply divided over Reserve Bank’s likely interest rate trajectory

Deep divisions are emerging among some of Australia’s leading bank economists on their outlook for interest rates and the Australian economy.

In one camp are those, such as the economists at Westpac and ANZ, who believe that the cash rate target will pass 3 per cent before the end of this year.

Both are tipping the RBA’s benchmark official rate to peak at 3.35 per cent — it is currently 1.85 per cent — meaning interest rates would almost double from where they are, rising by another 1.5 percentage points over the next six months or so.

The cash rate target was just 0.1 per cent at the beginning of May.

In fact, Westpac’s chief economist Bill Evans is not only predicting the cash rate will get to 3.35 per cent, but arguing it must if the Reserve Bank is serious about bringing down inflation.

Westpac and CBA logos
Westpac is expecting the cash rate to hit 3.35 per cent, but CBA thinks it will top out at 2.6 per cent before falling next year.(abcnews)

“The key reason why we insist that a sharper slowdown in demand is required in 2023 is that a much stronger set of demand conditions … runs the risk of resilient high inflationary expectations,” he wrote in response to the RBA’s Statement on Monetary Policy, released on Friday.

The Reserve Bank used market forecasts of a 3 per cent cash rate to underpin its latest economic forecasts, which did not have inflation falling back even to the top of its 2–3 per cent target range until the end of 2024.

Mr Evans said those forecasts showed that the RBA should raise rates more aggressively, even at the expense of slower economic growth — Westpac’s modeling tips annual economic growth of just 1 per cent next year if rates hit 3.35 per cent.

“Such an approach would give the bank the best chance of managing this difficult task of returning inflationary expectations to more normal levels and deflating the current ‘inflationary psychology’ which is now at risk of taking hold,” he said.

Too many rate rises could ‘take the economy backwards’

Then there is the other camp of economists, represented by the Commonwealth Bank and NAB among the big four, who cannot see the cash rate getting above 3 per cent in the near future.

“I don’t think it’s likely to happen because I think the Reserve Bank, once they get the cash rate to around their estimate of neutral [somewhere near 2.5 per cent]will want to pause and actually see how the economy’s responding to the rate hikes that they’ve delivered,” CBA’s head of Australian economics Gareth Aird told RN Breakfast.

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“They are putting through a lot of tightening in a very short amount of time and, if they continue to hike at the rate that they’re doing and just keep going all the way to 3 per cent and even above that level, they’ re not going to be able to actually assess the impact that those hikes are having on the economy in that in that amount of time.

“Now, it’s possible that they end up taking the cash rate to those levels, but I think if they do that, they’ll end up reversing gear in the not too distant future because … we have a highly indebted household sector in Australia and rate rises of that magnitude will just put too many households under stress and I think that will ultimately take the economy backwards.”

The Reserve Bank has recently changed its language slightly to emphasize that “it is not on a pre-set path”.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labor market,” RBA governor Philip Lowe said after last week’s latest half-a-percentage-point rate rise .


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