VIEW: Goldman Flesh Out Their Expectations Ahead Of Next Week’s Meeting

Thursday saw Goldman Sachs note that their “central scenario is for the RBA to raise the cash rate to a terminal level of 2.60% this year. This forecast is more dovish than priced by financial markets to end-2022 (2.90%) and end-2023 (3.60%), but more hawkish than the consensus of local economists to end-2022 (1.75%) and end-2023 (2.35%).”

• “Wages growth in Australia is not particularly strong as measured by the latest official data for Q122. However, with May’s surprisingly large rate hike, the RBA signaled a major forward-looking and hawkish shift in its reaction function - to recalibrate policy to the recent stronger wage signals from business liaison/surveys towards a stated estimated ‘neutral policy rate’ of around 2.50%. Against the backdrop of outsized rate hikes by key global peers, we see the risks as skewed towards the RBA front-loading the tightening cycle with 50bp rate hikes in June and July.”
• “There are risks to normalising monetary policy in Australia, particularly given high levels of household debt and likely extended falls in house prices. However, we view these risks as manageable for several reasons. We note that net housing debt (as a share of income) has actually fallen materially since the global financial crisis, the median Australian mortgagee is 21 months ahead on their mortgage repayments, seven years of macroprudential policy has substantially reduced risky lending, and our analysis on the composition of household debt and the implied rise in the debt-servicing burden looks manageable.”
• “Looking to next week’s meeting, our forecast 50bp hike is a close call. Recent mixed official wages data and the RBA’s greater optionality from more frequent meetings over H222 (relative to global peers) may make the RBA comfortable with gradual 25bp rate increases over H222. On a more technical level, it’s also possible that the RBA hikes by 40bp in June instead of 50bp, in order to re-align the level of the cash rate to be an increment of 25bp. On balance however, we lean towards a 50bp increase and particularly against the backdrop hawkish peer central banks and current market pricing. Indeed, the RBA may now be concerned that a ‘dovish’ 25bp hike would result in a deprecation of the Australian dollar and add to imported inflation.”