Commonwealth Bank expects rates to rise, other banks not so sure
The major banks have come to different conclusions about the future movement of interest rates following Glenn Stevens’ testimony to the House of Representatives Economics Committee.
Stevens told the committee the RBA had the capacity to hold firm during the current economic turmoil while keeping a close eye on inflation and local demand.
Most hawkish is the Commonwealth Bank, which is sticking with earlier forecasts of a 0.25% increase in November. The bank is forecasting the cash rate will rise to 5.75% by 2013.
“In our view, it appears that the risk is the RBA leaves rates on hold until the uncertainty over the global economic outlook fades. We still expect the next move by the RBA to be a hike,” Commonwealth Bank economists say.
CBA is forecasting inflation to rise to 3.2% in the 2012 calendar year following a forecasted 2.8% increase in 2011 calendar year. Unemployment is expected to drop from 4.9% to 4.8%.
The bank’s economists say a pick-up in housing loan approvals over the three months to June should help stem the deterioration in housing credit growth.
ANZ, which in the wake of the August correction in equity markets said emergency rate cuts were possible, is now forecasting rates to “remain on hold for the foreseeable future”.
“We cannot rule out the possibility of interest rate cuts given the now softer domestic/global economic outlook and the potential for greater dislocation in global financial markets. Indeed, while we broadly agree with the RBA's optimistic medium-term outlook, there are some clear near-term risks, most importantly a potential rise in the unemployment rate,” says Riki Polygenis, senior economist at ANZ.
“But any monetary policy easing (at this stage) is unlikely to be early or aggressive given the RBA's ongoing inflation concerns."
NAB has adjusted its expectations for a 25-basis-point hike in December and now “expect a considerable period of inaction by the RBA” with a rate increase in mid-2012.
“The downside risks to the Australian economy have built over the past few months. Concerns for international growth prospects have been reflected in sharp falls in Australian equity markets since the last week of July which, if sustained, are likely to weaken consumer spending and erode business confidence. This has come at a time when indicators of the Australian economy, such as employment growth and business conditions reported in the NAB Business Survey, have slowed, tempering expectations for economic growth in the second half of the year,” says NAB economists Alan Oster and Rob Henderson.
HSBC chief economist Paul Bloxham says the next move is more likely to be up than down, on the back of rising inflation.