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Model Indicates That Growth & Inflation Imply Hikes Needed Through 2023

RBA

We have updated our policy reaction function for the RBA with its latest forecasts provided on Friday. With the near-term upward revision to inflation and 2023 GDP expectations our equation now says that the economic fundamentals imply that rates should be 5bp higher by mid-year at around 4.18% and end-year around 5%.

  • The equation has been extended to end 2023 and says that rates should continue to rise over H2 given the economic outlook. The model is forward looking as the inflation variable leads by two quarters. It estimates that the Q1 2023 cash rate should be 50bp higher than Q4, and Q2 and Q3 up another 50bp each meaning it is more hawkish than OIS market pricing, but its starting point is higher than the actual cash rate.
  • When we take house prices into account, the rate path is lower with Q2 40bp below the model above and Q4 90bp. It is also below OIS market pricing in Q2 but in line for year end and closer than the equation without housing.
  • It is worth noting that these are just estimates from a simple equation and like with all econometric analysis, estimates are not predictions.
RBA cash rate estimations %

Source: MNI - Market News/Refinitiv

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