The lead economists of the S&P/ASX 200 Index (ASX: XJO) banks have run their slide rules over the latest 0.50% interest rate increase from the Reserve Bank of Australia (RBA). Tuesday's hike brought the official cash rate to 1.85%.
ASX bank shares gained on Tuesday in the wake of the RBA's announcement and retraced yesterday alongside a broader market pullback.
Now the top economic thinkers at the ASX 200 banks have dusted off their crystal balls and offered their forecasts on what investors can expect from the RBA over the rest of the year.
First, up Gareth Aird, head of Australian economics at Commonwealth Bank of Australia (ASX: CBA).
Top economist of biggest ASX 200 bank says keep an eye on wages growth
Aird expects the cash rate will reach 2.60% this year but says any weakness in wages growth could see the RBA reduce its tightening pace.
According to Aird (quoted by The Australian Financial Review):
Despite forecasts for below trend economic growth in 2023 and 2024 we do not expect the RBA to take the policy rate above their estimate of neutral provided they pause for a few months after reaching approximately 2.60%.
We expect the cash rate to be 2.60% by November. Our base case is a further 50 basis point hike in September and a 25 basis point hike in November, but the RBA could shift to 'business as usual' 25 basis point monthly increments from here if the upcoming data makes the case (particularly if the Q2 22 Wage Price Index, due 17 August, indicates wages pressures are below expectations). On that basis we would expect three consecutive 25 basis point rate hikes (ie. September, October, November) to still arrive at the same terminal rate of 2.60% in November.
Aird also pointed out that much of the data the RBA and financial analysts work with stems from the previous months, with the coming months likely looking significantly different. He added:
Note that there is a significant dichotomy in the domestic economic data at present and this will continue over coming months. Backward looking labour market data will remain robust, wages growth will accelerate and inflation will remain elevated. But forward looking data has deteriorated and further weakness is expected. This includes consumer sentiment, home prices, housing lending and building approvals.
RBA's language takes a modest dovish turn
David Plan, head of Australian economics at ASX 200 bank Australia and New Zealand Banking Group Ltd (ASX: ANZ), noted the moderately dovish shift in the RBA's language.
"The RBA tightened by 50 basis points at its August meeting. The key change from July is that there is no longer any reference to the withdrawal of extraordinary monetary support," he said.
According to Plan (courtesy of the AFR):
This could be a signal that the RBA Board may be thinking about reducing the size of the monthly increases to 25 basis points in September. We think a 50 basis point increase is still the most likely choice.
The RBA's updated forecasts have inflation peaking at 7.75% and only dropping to 'around' 3% through 2024. This is despite growth slowing below 2% in 2023 and 2024. We will be very interested to see what interest rate assumption is part of that forecast mix.
ASX 200 bank forecasts 'slightly restrictive monetary policy setting'
Ivan Colhoun, chief economist at ASX 200 listed National Australia Bank Ltd (ASX: NAB) said the RBA will need somewhat restrictive policies to get the inflation genie back inside the bottle.
"NAB's view is that seeking a return to 2-3% inflation will likely require at least a slightly restrictive monetary policy setting, which we suggest is in the 2.60% to 2.85% cash rate range," he said.
Colhoun continued (quoted by the AFR):
NAB remains comfortable with its 2.85% cash rate forecast for end 2022 but continues to see a step down in the size of rate increases after this next meeting and a likely pause before the year end. The 'not on a pre-set' path is likely to see significant debate about whether the Bank might even step down the pace of rate increases at the September Board meeting, while continuing to tighten.
NAB expects a further 50 basis point increase in the cash rate in September. With the cash rate then at 2.35% and approaching more neutral levels, we expect the Bank to step down to 25 basis point increases in October and November, to achieve a mildly restrictive 2.85 basis point cash rate in early November. A pause for some time is likely as the RBA assess the impact of recent moves.
There you have it.
If the top economists at these three ASX 200 banks have it right, we can expect the RBA to hike rates to between 2.60% and 2.85% by the end of 2022.
After that, we're likely to see some smaller and more gradual increases to bring inflation back into the central bank's 2% to 3% target range.
