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Highlights
- Inflation will be far higher than the RBA expectations, says senior CBA economist
- The economist said that by the end of 2022, the CBA’s forecast profile sees the cash rate at 1.0%, a 15bp increase in June.
- As per the economist, RBA’s forecast for inflation is different to CBA’s.
A senior economist at Commonwealth Bank of Australia (ASX:CBA), Gareth Arid has said that the Reserve Bank of Australia (RBA) would begin raising the cash rate in June.
In the CBA report, Aird has said that inflation will be far higher than the RBA expects and this might result in a 0.25% increase in the cash rate from a record low of 0.1% at the June board meeting.
He further said, by the end of 2022 the CBA’s forecast profile sees the cash rate at 1.0%, a 15bp increase in June, followed by two 25bp increases in Q3 22 and a further 25bp in Q4 22.
Earlier, RBA governor Philip Lowe had said that he would like to see a couple more quarterly inflation data before raising the cash rate.
"RBA’s forecast for inflation is different to ours," said Aird.
Also Read: Australian shares jump as RBA holds interest rates
The RBA expects reduced mean inflation to be 3.25% per year by mid-2022, including 0.75% quarterly hikes in Q1 and Q2. That is much lower than CBA’s underlying inflation projection. According to the bank’s preliminary estimates, the trimmed-mean CPI for Q1 22 will rise by 1.2% per quarter, bringing the annual rate to 3.5% (a six-month annualised pace of 4.4%).
Aird anticipates three further rate hikes in 2022, bringing the cash rate to 1%, followed by a move to 1.25% in early 2023.
In the minutes of its February 1 board meeting, issued on Tuesday (February 15), the RBA reiterated its intention to be patient before raising the cash rate for the first time in a decade.
Also Read: What does RBA expect from the Australian economy in 2022?
RBA's decision on bond-buying and cash rate
On February 1, the central bank announced that it has decided to stop buying bonds, with the final purchases on February 10, 2022. It is worth noting that the Australian central bank has been buying federal and state government bonds at a rate of AU$4 billion per week to inject liquidity into the system and keep market interest rates low to promote economic recovery.
Furthermore, the Reserve Bank of Australia kept the cash rate at 0.1%, a historic low (10 basis points).
The market was anticipating the RBA to soften its position on interest rate hikes and postpone its planned hikes to later this year rather than 2024, as previously said.
Also Read: Macquarie (ASX:MQG) ends 3% higher. Is it because of RBA’s rate decision?
