Key insights from the week that was.
Following a strong run of data, the past week was an opportune time to reassess core views ahead of the second half of 2021.
Most significantly, last Friday Westpac Economics revised its expectations for the RBA, bringing forward the timing of rate hikes from 2024 to 2023. Three hikes are now expected in March, June and December 2023, taking the cash rate to 0.75% by the end of that year.
As detailed by Chief Economist Bill Evans in a video update this week, the foundation for this change was the surprising strength shown in May’s labour force survey, 115k new jobs driving the unemployment rate down from 5.5% to 5.1%. We continue to expect a 1ppt decline in the unemployment rate over the coming year. From the lower starting point, this will put the unemployment rate in ‘full employment’ territory by mid-2022. While we expect wages growth to fall short of the RBA’s 3.0%yr ambition, low unemployment and inflation in the RBA’s target range is expected to be enough to justify lift-off for the cash rate.
The RBA’s tightening cycle is expected to continue in 2024, with two further hikes to 1.25% expected by November of that year. On the basis of debt serviceability, we believe 1.25% will likely prove the peak Australian cash rate for this cycle.
Our New Zealand team has also brought forward their timing for RBNZ rate hikes after last week’s strong Q1 GDP print. From August 2022, a gradual series of rate hikes is now expected at 3-to-6-month intervals, taking the RBNZ’s cash rate to 1.50% at end-2023 and 2.00% by end-2024.
For both the RBA and RBNZ, the FOMC will provide cover with respect to the currency. In December 2022, in between the RBNZ’s expected August 2022 move and March 2023’s first hike from the RBA, we see the FOMC enacting the first of 3 hikes, with the second and third following in March and June 2023. Three more hikes are expected by the FOMC in 2024, taking the fed funds rate to 1.625%.
In late-2022 and 2023, interest rate differentials are therefore unlikely to provide meaningful support for our currencies. Indeed, after a global-recovery induced swoon in mid-2022, we believe a trend depreciation will be seen, the Australian dollar falling from a peak of USD0.85 to USD0.78 from mid-2022 to end-2023 and the New Zealand dollar from USD0.78 to USD0.72.
Other major central banks are also expected to follow in the footsteps of the FOMC, albeit with the precise timing of their actions to depend on individual circumstances.
First hikes by the Bank of England and Bank of Canada may be slightly ahead of the FOMC in the second half of 2022 given their stronger focus on inflation and a belief it will sustain near target through 2022 and 2023. The ECB meanwhile is likely to lag the FOMC given the Governing Council expects Euro Area inflation to remain well below target through 2023 and has lingering concerns over the strength and quality of employment growth. The UK’s pound and the Canadian dollar are therefore likely to hold up better into 2023 than the Euro. Updated forecasts to end-2023 for key currency pairs are included in this week’s weekly.
As a final note, while data out this week has been second tier, the tone has remained supportive of a robust and broadening global recovery. Of greatest note, Markit’s PMIs for the US and Europe remained at abnormally-high levels in June. While these indexes are unlikely to hold on to these heights for much longer, a further broadening of the recovery in global supply will support above-average levels well into next year.
