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‘Game-changing’ jobless drop to push rates up in 2023
Game-changing employment figures and the strength of the momentum in the Australian economy will influence an interest rate rise prior to 2024, a big four bank has said.
‘Game-changing’ jobless drop to push rates up in 2023
Game-changing employment figures and the strength of the momentum in the Australian economy will influence an interest rate rise prior to 2024, a big four bank has said.
In its latest economic note, Westpac expressed its confidence in Australia’s economic momentum, which has yielded “game-changing” employment figures, with all signs said to be pointing to an official cash rate rise to as much as 0.75 per cent by the end of 2023.
According to the bank’s chief economist, Bill Evans, the strong economy will outweigh the RBA’s current lower for longer sentiment, pushing an official rate rise well ahead of the bank’s schedule.
“We now expect that the RBA will assess that it has achieved the conditions necessary for the first interest rate hike by the first quarter of 2023,” he explained.
In fact, Westpac believes three rate rises will occur prior to the end of 2023 – an increase of 15 basis points in Q1, to be followed by a further 25-basis-point lift in Q2, and a final 25-basis-point hike in Q4.
Mr Evans said the bank’s expectations are very much centred on the “very strong labour market”, with the RBA previously expressing its desire to see unemployment reach between 4 to 4.5 per cent before it considers a rate lift.
“The May employment report is a major ‘game changer’ for policy. It underscores the strength of momentum in the economy and endorses the range of other measures pointing to a very strong labour market,” he explained.
“The recovery is now clearly into a self-sustaining upswing, and the need for emergency stimulus policies has eased significantly.”
The chief economist was quick to highlight that the jobless rate is expected to keep subsiding, as the economy enters a self-sustaining upswing.
“With the starting point for the unemployment rate now at 5.1 per cent, rather than the 5.5 per cent we had previously expected for May 2021, we now forecast that the unemployment rate will reach 4.0 per cent by June 2022 and will drift down through the second half of 2022 to reach 3.8 per cent by year’s end,” he continued.
Mr Evans added, “Reaching full employment much earlier than previously expected points to upward pressure on both inflation and wages growth. We now expect underlying inflation to reach 2.25 per cent and wages growth to reach 2.75 per cent by December 2022.”
Noting that while not all of the RBA’s previous preconditions will be met by 2023, Mr Evans opined that the “sustainably above 3 per cent” wage growth condition, which had been used as a guideline in some of the governor’s speeches, is no longer a requirement.
On the contrary, Mr Evans believes the key conditions for raising rates are “actual inflation is sustainably within the 2-3 per cent target range” and “return to full employment”, both of which Westpac expects to be met by end 2022.
“We think there may be some flexibility around the 3 per cent wages growth condition,” the economist concluded.
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