One thing’s for sure. The Reserve Bank of Australia’s forecast that interest rates won’t rise until 2024 is now dead and buried.
RBA governor Phillip Lowe is now saying a rate rise this year is “plausible”.
Addressing the National Press Club last week, Lowe saw unemployment continuing to fall – down to as little as 3.75 per cent by the end of this year – and said he expects underlying inflation to peak at just over 3 per cent, before returning to the 2-3 per cent target band.
“Interest rates will go up, and the stronger the economy, the better progress on unemployment, the faster and the sooner the increase in interest rates will be," Lowe said.
The economic figures released by the RBA in its Statement on Monetary Policy are impressive and may underscore Scott Morrison’s election campaign and claims of superior economic management.
Despite the Delta and Omicron waves of COVID, economic growth has been much higher and unemployment much lower than expected in February 2021.
The RBA expected unemployment of 6 per cent. Instead it got 4.2 per cent. The RBA sees GDP to have grown by 5 per cent over 2021, and forecasts it will grow by around 4.25 per cent over 2022 and 2 per cent over 2023.
The expected inflation with a headline rate of 3.5 per cent, might signal higher inflation for Australia, but our underlying inflation rate, a touch under 2.7 per cent, is much lower than in the US (7 per cent), UK (5.1 per cent) or New Zealand (5.9 per cent). It also happens to be in the middle of the RBA’s 2-3 per cent target band.
Epidemiologists forecast the Omicron wave will continue to diminish. And the rollout of vaccine boosters and new anti-viral drugs along with strategies of masking and distancing, will push COVID into Australia’s rear-view mirror and might turn it endemic and remaining under control.
This will see Australia slowly returning to its pre-pandemic state with open borders and no lockdowns and restrictions.
However, the big economic issue facing Australian households and businesses this year will be the size of inflation, when the RBA will increase and how many rises we can expect this year.
The RBA remains committed to keeping its cash rate at the current low of 0.1 per cent for a while yet.
Westpac chief economist Bill Evans tips a gentle 0.15-percentage-point cash rate rise in August, followed by another 0.25-percentage-point increase in October. The Commonwealth Bank is also forecasting a rate rise in August.
AMP Capital chief economist Shane Oliver also sees the RBA raising rates this year.
“The economy is running stronger than expected, unemployment is likely to push below 4 per cent and this will drive an acceleration in wages growth to a 3 per cent greater pace in the second half – meeting the conditions for an RBA rate hike later this year,” Oliver said.
“Ultimately, we see the cash rate rising to around 1.5 to 2 per cent in the years ahead but it’s a bit of guess and the RBA will only