Markets rethought the chance of an easing in Australia a little last week, according to Westpac Chief Economist Bill Evans. He said the “probabilities have halved from around 72% to 36%” after the the release of the CPI data which showed that while the headline did as expected and hit 3%, the quarterly growth rate of 0.8% for the underlying CPI was a little higher than expected.
Realistically there were little implications for the outlook of Australian interest rates any time soon other than to reinforce the RBA’s message about an extended period of stable rates.
But in his excellent weekly note Evans has discussed the when – and by how much – of the next interest rate tightening cycle.
In terms of the when rates will rise the good news is that Evans doesn’t think rates are moving till late 2015.
In terms of the more significant question for Australian’s back pocket and consumption Evans believes rates will rise 2.25% from the current 2.5% to 4.75%.
“Westpac is expecting the next tightening cycle to begin in the second half of 2015. Markets are likely to begin to anticipate that cycle around 6 months in advance. While markets are currently in denial that a business cycle exists, current market estimates of the peak rate in the cycle look to be conservative.”
“With the neutral cash rate around 4% we expect the next market peak in the cash rate to be 4.75% – fixed rates are likely to eventually embrace that outlook,” Evans said.
Even though Australian households are rebuilding their balance sheets a move of this magnitude will challenge a large number of Australian households grown accustomed to low rates and makes the low fixed rates on offer at the moment at a large number of Australian institutions look really attractive.