Australian bank economists are continuing to push back their forecasts for the next RBA rate hike

Economists at Westpac and CBA have extended their forecasts for the next RBA rate hike again.
CBA now expects rates to stay on hold until November 2019, while Westpac forecasts no change all the way to 2020.
Both banks cited low inflationary pressures and stability risks in the housing market as the core reasons for their revised view.

Economists from Westpac and Commonwealth Bank have extended their forecasts for the next RBA rate hike.

It forms part of a consistent trend in recent months, following similar changes from the NAB in May and ANZ in June.

In line with recent comments from the RBA, all four big banks still expect the next move in rates to be up.

But their timeframes for when it will happen continue to be extended. Here’s the latest scoreboard for rate hike expectations among the big four:

At December 2020, Westpac’s forecast is now well in advance of the median forecasts among economists surveyed by Bloomberg, which have the first rate rise occurring by September 2019.

Westpac chief economist Bill Evans said the RBA has set a “high bar” for cutting rates.

That means rates are unlikely to move lower, even though “the Australian economy is currently being subject to tightening financial conditions, despite the RBA cash rate remaining on hold”.

By tighter conditions, Evans is referring to the notable slowdown in credit growth for residential mortgage lending, particularly to housing investors.

He said tighter lending standards mean the ongoing price falls in Australia’s housing market “look set to be sustained for at least the remainder of 2018 and 2019, with soggy markets likely prevailing through 2020”.

In extending his forecast for the next rate hike to November 2019 from February 2020, CBA chief economist Michael Blythe also cited housing as part of the core policy challenge facing the RBA.

“The binding constraint in the monetary policy debate is the interaction of high levels of household debt and weak income growth,” Blythe said.

He added the credit squeeze is being exacerbated as more people shift into principal & interest repayments from interest-only loans.

Blythe also highlighted some recent subtle shifts in RBA commentary, particularly around its target range for inflation of 2-3%.

The central bank now refers to its inflation target as “returning to the midpoint”, instead of “2-3% over the cycle”.

And in its updated economic projections earlier this month, the RBA said it expects inflation growth to remain at 2.25% all the way to the end of 2020.

Taken together, those two factors “could be read as implying no rate changes this side of 2021”, Blythe said — which would be in line with Westpac’s forecasts.

However, “applying the CBA magnifying glass to the RBA’s inflation chart reveals the point estimates have a modestly rising trend continuing during 2020”, Blythe said.

“And that is probably enough to get a rate rise over the line by late-2019.”

Although NAB’s latest business survey pointed to some extra tightness in the labour market towards the end of this year, Westpac’s Evans expects upward pressure on wages — and by extension inflation — to remain low.

He cited extra slack in the labour market and cheaper electricity prices as two other factors which will “keep the inflation rate anchored around 2%”.

“The RBA sets the unemployment rate and inflation as the keys to triggering higher rates. Our unemployment and inflation forecasts are consistent with steady rates in 2020.”