RBA Will Begin Raising Interest Rates in Early 2023, Evans Says

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The Reserve Bank of Australia will begin raising its key interest rate in early 2023 as the key metrics set by policy makers for the economy will be met by then, Westpac Banking Corp.’s chief economist said.

“The May employment report is a major ‘game changer’ for policy,” Bill Evans wrote in a research note Friday. “The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly.”

The Australian dollar dropped as much as 0.5% Friday, before retracing some of the losses, and was down 0.2% at 75.35 U.S. cents as of 3:48 p.m. in Sydney. Three-year bond yields jumped as much as 8 basis points.

Evans’s call comes a day after a spectacular jobs report showed unemployment fell to 5.1% in May, back to pre-pandemic levels, and the economy added more than 100,000 positions. It comes a week after Australia & New Zealand Banking Group Ltd. predicted rate hikes would begin in the second half of 2023.

Westpac expects the RBA will increase the current 0.1% cash rate by 15 basis points in the first quarter of 2023; 25 basis points in the second; and a further 25 basis points in the final three months of that year.

“That would restore the cash rate to 75 basis points by end 2023, in effect reversing the ‘emergency’ rate cuts in 2020 when the RBA responded to the Covid crisis,” he wrote.

Full Employment

Evans reckons the jobless rate will fall to 4% by next June, a level he considers full employment, and “drift down” through the second half of 2022 to reach 3.8% by year’s end. RBA Governor Philip Lowe has said the economy can probably handle unemployment in the low 4s or high 3s, suggesting he sees the maximum level similarly.

Evans said he doesn’t believe wage growth will have to exceed 3% as a condition for the initial rate increase. The key conditions for raising rates, Evans said, are actual inflation sustainably within the 2-3% target range and a return to full employment.

The RBA is due to decide at its July meeting whether to roll over its three-year yield target to the November 2024 bond or keep it at the current April 2024 bond. Most economists expect it will keep the present maturity. The board is also due to announce a third tranche of longer-dated bond purchases.

Evans expects it will adopt a A$5 billion weekly target, with a review likely by the December board meeting.

“That will accumulate around a further A$65 billion in bond purchases, with the pace of future purchases being cut back, in the new year,” he said. “We still expect purchases, at a slower pace, to continue through to the middle of 2022.”

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