Overheated wages and spending data has convinced ANZ economists next week’s interest rate rise will be far stronger than initially forecast, with the lender now expecting the Reserve Bank to add 40 basis points instead of 25.
The Big Four Bank says Wednesday’s GDP figures hinted runaway inflation will require a stronger hand from the RBA at next week’s board meeting, tipping the current target to more than double its current level of 0.35 per cent to heap more pain on borrowers.
RBA Governor Philip Lowe last month got the ball rolling on a widely expected hiking cycle when he abandoned emergency pandemic settings and lifted the cash rate target for the first time in 12 years.
Commonwealth Bank economists expect another 25 basis points to be added to the cash rate target on Tuesday, while the market is pricing in 40 basis points, a figure ANZ is now aligned with.
If ANZ’s prediction comes to fruition, it means the cash rate target will rise to 0.75 per cent and potentially add another $111 to monthly repayments on a $500,000 loan.
ANZ on Thursday said its shock forecast shift was triggered by first quarter GDP data which pointed to an even bigger inflation problem for Australia than previously thought.
National accounts revealed a relatively solid economic performance for the first three months of the year, with quarterly growth of 0.8 per cent underpinned by a spending surge which defied the impacts of Omicron, flooding and the war in Ukraine.
But ANZ said the data also contained worrying indicators more urgent action will be needed from the Reserve Bank to keep prices under control.
“While GDP was in line with our expectations, wages data showed that average non-farm hourly earnings rose more than 5 per cent over the past year,” ANZ wrote in a note.
“This is well above our expectations from just a few weeks back and certainly much stronger than the signal from the Wage Price Index.”
ANZ also noted the broadest measure of consumer inflation – the household consumption deflator – had the highest quarterly increase since 1990.
“As such we think the strength of the price and wage measures in the GDP data should be enough to convince Governor Lowe that ‘there is a very strong argument’ to deviate from a regular 25bp move and get the cash rate a little higher a little bit faster” ANZ wrote.
Commonwealth Bank senior economist Gareth Aird said he was sticking to a 25 basis point prediction as Wednesday’s data predated the RBA’s May rate hike and hence could not tell us much about the future.
“There are already signs that rising rates and the expectation of further hikes will act to cool the economy,” Mr Aird wrote.
“And the optics of delivering a larger than 25bp increase in the cash rate in June might imply that the RBA Board has changed their assessment of the outlook for inflation and/or inflation risks based on the change of Government.
“That is not a message we believe the RBA would want to send. Indeed, we do not think that the Board will change their assessment on the outlook for inflation because of a change in Government.”
Canstar analysis shows that a 25 basis point hike on Tuesday could add $69 to monthly repayments on a $500,00 loan.
Combined with the May rate hike, that’s an extra $121 a month.
If rates go up by 40 basis points, that’s an extra $111 a month, or $163 when combined with last month’s rise.
People repaying a $1m loan face a monthly repayment rise of $138 for a 25 basis point hike, and $222 for a 40 basis point hike.
“Unfortunately, the first increase in repayments in 11 years is just a taste of what is to come, and puts borrowers on notice that now is the time to financially prepare as best they can,” Canstar finance expert Steve Mickenbecker said.
“A forecast 2.5 per cent cash rate in a couple of years adds $681 to monthly repayments on a $500,000 loan.”