ABC sticks to economic forecast after Labor victory

The big bank said a change in government does not currently require changing its economic forecast or interest rate expectations.

Commonwealth Bank (CBA) economists have announced that there will be no immediate change in the bank’s outlook following Labor’s election victory.

Although Westpac economists suggest the RBA could raise the cash rate by 40 basis points in June, the CBA maintained its 25 basis point hike.

“In our view, the new government has made few proposals during the election campaign that require us at this stage to revise our economic forecasts,” explained Gareth Aird, head of Australian economics at the ABC.

“In other words, our economic forecast and call the [Reserve Bank] The RBAs are unchanged despite the change in national leadership.

The bank currently expects core annual inflation to rise to 4.6% in the December quarter from 3.7% in the March quarter, before stabilizing at 2.7% last quarter of 2023.

The unemployment rate, which hit a nearly 50-year low of 3.9% in April, is expected to remain at 3.75% until the end of 2023, while the wage price index is expected to rise steadily , rising from 2.4% currently to 3.4% by the end of next year.

Additionally, an annual GDP growth rate of 4.4% was forecast by the bank for the fourth quarter of this year before growth reverses to 2.6% in the fourth quarter of 2023.

“There will of course be policy changes. Reform is expected around care for the elderly, childcare, housing and health. And there will be more focus on climate-related policies as Labor has set a 43% emissions reduction target by 2030, compared to the coalition government’s 26-28% target precedent by 2030,” Mr. Aird noted.

“But these areas do not change the dial of our economic forecast, which extends to the end of 2023.”

On interest rates, Mr Aird argued that the RBA should still hike rates “as usual” by 25 basis points next month – the same amount as this month.

“The Q1 22 WPI, released last week, indicates that the RBA is not facing a price and wage spiral like what is currently being seen in some other jurisdictions. As a result, the RBA does not have to fight wage growth by aggressively raising the cash rate,” he said.

“Furthermore, the prospect of a more than 25 basis point increase in the cash rate in June could imply that the RBA board has changed its assessment of the outlook for inflation and/or inflation risks. inflation depending on the change of government.”

Looking further ahead, the ABC said cash rate hikes are expected in July, August and November, taking the cash rate to 1.35%. The bank has scheduled another hike for February next year, which would take the rate to 1.60%, where it is expected to remain through 2023.

“A new budget is due in October 2022. The new budget will fully flesh out the Labor government’s fiscal strategy,” Mr Aird added.

“We will take into account all the information provided by the new government, including in the budget planned for October, when assessing the economic and political outlook.”

The bank’s forecast comes after the central bank revealed it was considering three options for the size of the rate increase for May: a 15 basis point, 25 basis point or 40 basis point increase.

“Members agreed that raising the cash rate by 15 basis points was not the preferred option given that the policy was very stimulative and it was highly likely that further rate hikes would be required” , says the minutes.

“A 15 basis point increase would be inconsistent with the historical practice of changing the cash rate in increments of at least 25 basis points.

“The board will continue to monitor these and other issues closely as it determines the timing and magnitude of future interest rate increases.”

[Related: Cash rate to more than double in June: Westpac]

ABC sticks to economic forecast after Labor victory

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Last update: May 24, 2022

Posted: May 25, 2022

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