CBA predicts when interest rates will rise

"The RBA's forecast for inflation is different to ours"

CBA predicts when interest rates will rise


By Micah Guiao

The Commonwealth Bank of Australia (CBA) has shifted its original forecast of a rise in interest rates from August to as early as June.

Gareth Aird, head of Australian economics at CBA, said the nation’s biggest lender was “very comfortable” with this new expectation that inflation will be stronger than the Reserve Bank of Australia (RBA) projection and that official interest rates will start to rise in June with a 15-basis point increase.

This comes after RBA Governor Philip Lowe said the bank was looking for more consumer price indexes before making the final decision. Since the start of February, Lowe has been hinting at an increase in interest rates to counter rising inflation, making it harder for Australians with mortgages to pay.

CBA’s research note admits coming up with the “exact timing” of rate hikes is “false precision,” but the bank has laid out an approximate forecast for when rates will rise and by how much.

“We interpret this statement to mean that the RBA will conclude that inflation is ‘sustainably within the target range’ if the next two inflation prints are in line with their forecasts,” Aird said. “Based on the Governor’s comments last week we believe the RBA’s central scenario and reaction function is consistent with a first increase in the cash rate in August 2022. But the RBA’s forecast for inflation is different to ours.”

Aird added that the cash rate was likely to be 1% by the end of the year and 1.25% by early next year. This would amount to an average variable rate of 4.5% if it went as predicted. To illustrate the magnitude of the increase, a borrower with a $500,000 standard variable rate mortgage would see monthly repayments increase about $275 with a 1% rate increase, and about $560 with a 2% increase.

There has been no increase in the key official interest rate since November 2010. Some economists were speculating for a cash rate increase from 0.1% to more than 2% — a 20 times increase on the current record low meant to cushion the impacts of the pandemic recession ­– after the December quarter posted stronger-than-expected inflation last month.

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