ANZ joins NAB in predicting RBA rate hikes in 2018

ANZ has forecast that the Reserve Bank will turn hawkish and raise rates twice next year.

Earlier, another Big Four bank, NAB said the central bank could raise rates twice next year from an earlier view of no hikes.

ANZ's new forecast was based on a more positive view of the domestic economy with both growth and inflation picking up, with unemployment rate expected to fall to 5.3 per cent by the end of 2017.

"In sum our outlook for 2018 is a touch more positive than before, reflecting a stronger outlook for non-mining business investment, the strength in public sector spending [not only in the infrastructure space] and a shallower dip in residential construction than previously expected," ANZ's head of Australian economics David Plank wrote in a note to clients, according to ABC news.

According to the ANZ, the real cash rate — the rate adjusted for inflation — was already negative and if growth accelerates and inflation picks up as expected, it will become even more negative and unnecessarily stimulatory.

"[The] RBA has progressively shifted to a hawkish outlook," Plank said.

NAB had echoed the same sentiment, saying GDP expectations have been revised up, unemployment revised down and consequently inflation moves up as well.

NAB's head of global research Peter Jolly noted the most confident thing he could say about the bank's change in forecast was it would not be the last.

"The big deal here is that having been on a declining trend since 2011, for the first time, NAB is now saying we have seen a turning point for Australia's interest rate cycle," Jolly said

However, the top two — Commonwealth Bank and Westpac, are staying pat on their forecasts, with CBA predicting one rise in the fourth quarter next year while Westpac sticking to a hold right through 2018.

In fact, Westpac chief economist Bill Evans said he does not share the optimism of either the other banks or the RBA about the economy.

"I think the RBA believes it will be raising rates next year," Evans said.

"They are very optimistic on growth, they believe they will see strong income growth."

But Evans thinks the RBA is wrong.

He recently wrote that “Westpac expects that concerns with weak income growth weighing on consumer spending and eventually the jobs market will dominate the policy debate in 2018”.

“The sustained application of macro-prudential policies is likely to continue to ease conditions in housing markets precluding any need for the Bank to raise rates next year.”

ANZ's David Plank concedes household consumption will remain relatively subdued, even if income growth picks up.

The bigger risk to his two-hike theory would be the on-going appreciation of the Australian dollar.

"Likewise, evidence that core inflation or wages are slowing again would rule out a rate hike in 2018."