CommBank is now expecting the Reserve Bank of Australia (RBA) to start moving the needle for the cash rate by November next year.

CommBank's latest Economic Insights report points to robust economic outcomes next year on the back of "exceptional" vaccine take-up, stability of the labour market, and the reopening of NSW and Victoria.

"There is of course still a great deal of uncertainty about the future as we transition from a COVID-19 pandemic to a world where the virus is endemic," CommBank said.

"But it is our assessment that we are in for a less choppy ride than we previously expected because the take-up of the vaccine has been world leading."

Series of rate cuts

CommBank has wound back to its pre-Delta outbreak call for the RBA to raise the cash rate starting November 2022.

"We have pencilled in a first increase of 15bp in November 2022, which would take the cash rate to 0.25%," the bank said.

A further 25bps increase is likely to happen in December 2022, which will bring the cash rate to 0.50%.

CommBank said three further 25bps hikes are expected over the next two years — the first two would happen at around the first and second quarter of 2023. This would lead to an increase in the third quarter of 2024 when the cash rate is projected to be at 1.25%.

"Overall, we expect it to be a shallow and gradual tightening cycle given the elevated level of household indebtedness," the bank said.

This is a far-cry from the outlook of the RBA. The central bank remains firm that unless its wage growth and inflation rates are met, the cash rate will stay where it is until 2024.

Strong economic indicators

CommBank's latest report indicate rosy forecasts for several economic indicators, including household spending, inflation, and wage growth.

On the household spending front, it said that the earlier-than-expected reopening of lockdown-stricken states will contribute strongly to the growth in household expenditure.

"We now expect real household expenditure to rebound by 5.9% in Q4 21 following a forecast contraction of 6.8% in Q3 21. Looking further ahead, we anticipate very strong growth in household expenditure over 2022," the bank said.

The strong growth in spending would go along positive outlook for wages and unemployment over the next year.

"We forecast the unemployment rate to end-2021 at 4.7%. Strong employment growth over 2022 will see the unemployment rate on our figuring drop to around 4.0% by end-2022," CommBank said.

In terms of inflation, CommBank is expecting the underlying rate to be at 2.5% by mid-2022, which is around the middle of the RBA's 2% to 3% target range.

Westpac's cash rate call

Westpac has maintained its stance that the RBA will only be raising rates by the first quarter of 2023.

Westpac chief economist Bill Evans said the first rate hike would likely be a 15bps increase in February 2023, which will bring the cash rate to 0.25%.

“If we were to see such changes in the Bank’s forecasts in the November Statement on Monetary Policy the issue arises as to whether the Governor would be prepared to alter the guidance, ‘The central scenario for the economy is that this condition will not be met before 2024.’,” Mr Evans said.

“I would strongly applaud acceptance that the Governor now expects that the conditions necessary to begin the move away from the emergency policy settings will be achieved earlier than previously expected.”

—

Photo by Isaac Smith on Unsplash