VIEW: ANZ: RBA To Hike In May '23, QE to End In May '22

ANZ note that "the resilience of the labour market and rising inflation expectations have us expecting wages growth at or above 3% by the end of 2022. Adding this to the stronger global inflation pulse means we now see inflation lifting to 2.5% in Q1 2023. This will be the trigger for the RBA to tighten."

• "Given that the momentum in underlying inflation will have been evident since late 2022, we think this will be enough to satisfy the RBA that inflation is sustainably at the mid-point of its target band and so trigger the first rate increase in May. We think the RBA will lift the cash rate to 0.25% in May and then follow with further 25bp rate hikes in Q3 and Q4."
• "Given the RBA is starting the tightening of the cash rate intentionally late in the cycle, this pace of rate hikes may seem too modest. But other market interest rates are already rising, so the 75bp lift in the cash rate understates the extent to which interest rates will have lifted by 2023 compared to where things were in late 2020/early 2021."
• "In our view, the upgrade to the RBA's forecasts is consistent with a faster tapering of QE than we expected. It could cut QE to zero in February on the basis that it is another of its emergency measures that is no longer required. But, with the Fed indicating it will continue bond purchases until the middle of 2023, a February finish looks to be a bit aggressive. Rather, we think the RBA will reduce weekly bond purchases to A$2bn in February and end them altogether in May."
• "The level of uncertainty means the outlook can be quite sensitive to a few data points. In the very near term, the biggest influence on our thinking will be Q3's WPI data."