• The Commonwealth Bank economics team is now forecasting interest rates to rise as soon as next year, two years earlier than the RBA.
• Australia’s central bank has repeatedly stated the official cash rate will remain at 0.10% until 2024 “at the earliest” as it tries to give unprecedented forward guidance.
• However, as unemployment falls and the economy grows faster than expected, the RBA may not have much choice but to hike rates sooner than anticipated.
• Visit Business Insider Australia’s homepage for more stories.

Well, that didn’t take long.

Australia will need to brace for rising interest rates as soon as next year, if the country’s largest retail bank and mortgage holder is to be believed.

On Wednesday, the Commonwealth Bank – which holds more than $463 billion in home loans – called the RBA’s bluff that interest rates won’t move until 2024 “at the earliest”, forecasting a number of quick-fire rate hikes.

“Our central scenario has the RBA delivering the first hike in the cash rate in November 2022. We have pencilled in an increase of 15 basis points which would take the cash rate to 0.25%. We expect that to be followed by an increase of 25 basis points in December 2022,” CBA head of Australian economics Gareth Aird wrote in the new research note.

Aird expects it will be followed by three more hikes in the first three quarters of the year, taking interest rates to 1.25% by September 2023, “the level at which we assess the cash rate to be neutral”.

If accurate, the path higher would return interest rates to a level not seen since June 2019, raising them higher than even before the pandemic.

Under this “central scenario”, unemployment would fall to just 4.5% a the end of this year, and 4% at the end of the next one. It would be sufficient to produce 2.9% wage growth by Christmas 2022, under CBA’s modelling, and force the RBA to hike, although there are obviously question marks over the exact timing.

“The risks are not all one way. There are scenarios that could see the RBA pull the rate hike trigger earlier than November 2022, particularly if they tweak their reaction function because it becomes irrefutable that wages growth is on a path to 3% per annum — the rate of growth they have targeted,” Aird said.

“Alternatively, the RBA could delay hiking the cash rate if growth in labour supply was to accelerate quickly when the international border is reopened.”

This second assumption is really the crucial piece of the puzzle. Aird believes Canberra will be reluctant to fling open international borders, instead prioritising those who will satisfy dire skill shortages.

“We think that policymakers are more cognisant of the link between immigration and wages due to the pandemic. As a result, we anticipate immigration targets will be recalibrated so that the desired tightening in the labour market is not derailed by the reopening of the international border,” he wrote.

“A more nuanced approach to population policy will enable higher wage outcomes to materialise in a sustainable way and will allow monetary policy to be normalised.”

The analysis acknowledges the key fact that monetary policy is in a sense totally out of the RBA’s control. Out of monetary ammo, the ability to hit growth targets is now firmly the prerogative of policymakers.

The path forward will be one forged by how the Morrison government decides to proceed, as well as the kind of settings other central banks, like the US Federal Reserve, choose to maintain. Likely to be stimulatory, the RBA will have no choice but to raise rates locally.

It would mark a stunning turnaround for the central bank, which as of its last monetary statement is still adamant, at least officially, that 0.10% interest rates have years left to run, despite trillion dollar stimulus packages being unleashed around the world.

The unprecedented economic support, orchestrated by both governments and central banks, has promised Australia among other nations the kind of economic growth not seen for years, pumping up asset prices in the process.

As interest rates fell, and quantitive easing (QE) programs took hold, lending records have been shattered, with Australians currently buying $1 billion worth of property each and every day.

However, as such stimulus is unwound, mortgage repayments are set to rise again, as higher interest rates return. While the country’s financial regulators remain coy on whether they will intervene, they collectively acknowledge the risks are rising for borrowers who may not be able to service million-dollar debts.

The risks inherent to raising rates too quickly are significant. While the RBA will be cautious, it won’t sit on its hands forever.

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