BUDGET 2022: eyes now on rates

With the Federal Budget out of the way, the focus now turns to how monetary policy will manage Australia’s economic complications, including the challenging inflation dynamic, according to ANZ Chief Economist Richard Yetsenga.

Speaking on an ANZ customer call the morning after the Australian Federal Budget, Yetsenga said the budget came at a complicated period for fiscal policy, amid the pandemic, crisis in Europe and inflation.

“The discussion for the other arm of policy, of course, is the Reserve Bank,” he said. “It's not an ‘if’, but a ‘when and by how much’ the Reserve Bank will hike [interest rates], and ‘how fast they will go’.”

“[ANZ Research has] been of the view the timing is a difficult one, because we're effectively sitting here trying to guess when the RBA decides they've been patient enough. But what matters is the quantum we've been looking at, thinking that the tightening cycle would be quite significant.

“Interest rates will be at 2 per cent, we think, by the end of next year. This budget is very firmly in the column of forces which are likely to make us more comfortable with that view.”

Also on the call were Tammy Medard, Managing Director, Institutional Australia and PNG, and Felicity Emmett, Senior Economist at ANZ.

Hikes

Emmett said ANZ Research expected the hikes to come relatively quickly.

“We think the first hike will come in the third quarter of this year, probably September, possibly August,” she said. “And then the [RBA] will gradually raise rates by 25-basis-point increments until it gets to two per cent by the end of 2023.”

Any risk to that forecast is on the side of an earlier start, Emmett said, as the RBA looks offshore to what other central banks are doing – particular the United States’ Federal Reserve.

“The inflation situation in the US is very different to what it is here,” she said. “Headline inflation is running at 7 per cent, compared to just above 3 per cent here.”

“The Fed has… really gained a sense of urgency around lifting interest rates in the US. And I think the RBA will be conscious of risk.”

Yetsenga said it was inevitable the RBA would respond to these risks.

“The prospect is for the entirety of 2022, inflation is running well ahead of interest rates,” he said. “And even if we arrive at interest rates of up to 2 per cent by the end of [2023], that will probably be another year where inflation is also running ahead of interest rates.”

Focus

Medard said it was clear the 2022 budget had shifted in focus from recent previous editions which provided pandemic-era support for businesses.

“What stood out to me is the past two federal budgets have been very much focussed on supporting businesses of all sizes get through the COVID pandemic,” she said. “This budget seems to be much more focussed on supporting households [to cope with] inflation and the cost of goods.”

Emmett said business would benefit from some measures in the budget, including support for training and upskilling, which she said was “very important in an environment where… labour shortages are a key issue”.

“The number of measures is relatively small compared to the previous few years, which have been really focussed on supporting businesses through COVID,” she said.

There is no question the Australian households targeted by the budget have accumulated debt, according to Yetsenga – but they have also accumulated assets and - critically - bank deposits.

“If we look at household debt net of bank deposits, the sector is in its best position in nearly 20 years,” he said. “That suggests households will cope well with higher interest rates.

“But It also implies the RBA is going to have to move quite some way [on interest rates] to really be sure it's got the right policy settings to keep inflation within 2 to 3 per cent.”