CBA (ASX:CBA) economists expect inflation sooner than RBA

Australia’s largest bank provides an alternative economic outlook to the RBA’s forecast.

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Senior economists from the Commonwealth Bank of Australia (ASX: CBA) expect inflationary conditions in the Australian economy to be met earlier than the RBA’s initial forecasts, a new report from Commsec details.

In the release, economists Craig James and Ryan Felsman spell out the Commonwealth Bank’s views on the cash rate, the jobless rate numbers moving forward, interest rates decisions, and inflationary expectations for the coming periods.

Let’s take a look at what the report captures in closer detail.

Inflation sooner than RBA expectations

Commentary within the report alludes to the RBA’s expectations of holding the cash rate at 0.10% all the way until 2024:

The Reserve Bank (RBA) doesn’t expect to start lifting the cash rate until 2024 at the earliest.

But James and Felsman retort the RBA’s posture on the cash rate, stating:

However we believe that the risks are tilted to unemployment surprising on the downside and wage and price inflation surprising on the upside.

The research also indicates the RBA ideally wants to observe the jobless rate fall towards 4% (considered full-employment of the economy by RBA standards). Only when this occurs, the RBA views wage growth of ~3%.

In fact, according to the report, CommSec analysts view the following three “pre-conditions” necessary to occur before an early hike to the cash rate:

  • Annual inflation sustained between 2-3%
  • Growth in annual wages lifted to 3%
  • Full employment as measured by the jobless rate ~4%.

“And when these [three] conditions hold, the RBA expects inflation to sustainably hold between 2-3%,” the duo state in the report, pointing out the RBA also doesn’t expect this to occur until 2024.

However, CBA economists anticipate these circumstances to align earlier, estimating the RBA will begin normalising the cash rate from the back end of 2022 if, and only if, the three conditions outlined above are met.

Should these conditions align before 2024, the CBA economists are confident the Australian economy will absorb inflationary pressures as early as 2022, ahead of the RBA’s schedule.

Additional commentary

The report also outlines additional CBA expectations regarding the outlook of the Australian economy.

The economists view the jobless rate to finish this year at 4.5%, before declining to 4% at the end of 2022.

Consequently, the analysts believe annual wage growth will expand from 1.5% to 2.9% by the end of 2022, reaching 2.4% by the end of 2021.

The bank also expects the Australian economy to grow by 3.9% in 2021-22, but notes several risks factors:

Risks to the forecasts include virus outbreaks; slow vaccine take up or vaccine shortages; policy mistakes on the removal of support measures; Chinese political tensions and extended delays in the re-opening of foreign borders.

Finally, the economists “conservatively forecast” the S&P/ASX 200 Index to hover within the ranges of 7,400 to 7,700 by the first half of 2022.

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