The economics team at Westpac Banking Corp (ASX: WBC) have been busy factoring in recent data into their estimates and have made some sweeping changes to their forecasts.
The key one being when it believes the Reserve Bank of Australia will begin to lift the cash rate at long last.
What did Westpac say?
According to the latest Westpac Weekly, the bank's Chief Economist, Bill Evans, believes the recent reduction in Australia's unemployment level has been a game changer.
Mr Evans commented: "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. The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly."
In light of this and comments out of the US Federal Reserve last week, the broker believes that wider economic risks from COVID-19 have eased and policy normalisation can be brought forward.
Furthermore, the Chief Economist doesn't believe May's unemployment report was a one-off and has now brought forward his estimates accordingly.
He explained: "With the starting point for the unemployment rate now at 5.1% rather than the 5.5% we had previously expected for May 2021 we now forecast that the unemployment rate will reach 4.0% by June 2022 and will drift down through the second half of 2022 to reach 3.8% by year's end."
This is important because the bank believes that 4% is "full employment" and expects the Reserve Bank to have a similar view.
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% and wages growth to reach 2.75% by December 2022."
Monetary policy implications
As a result of the above, Westpac now expects Australia's economy to be in a position to have its first interest rate hike much earlier than anticipated.
Evans explained: "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. We expect an increase of 15 basis points in Q1; to be followed by 25 basis points in Q2; and 25 basis points in Q4."
"That would restore the cash rate to 75 basis points by end 2023, in effect reversing the 'emergency' rate cuts in 2020 when the RBA responded to the COVID crisis," he added.
Though, based on these estimates, it may be a while until rates return to normal levels again. This could mean that dividend shares remain the best place for income investors to generate a passive income for a little while to come.
