ANZ revises cash rate prediction on back of strong wages

The ANZ bank has tipped the Reserve Bank of Australia (RBA) will lift the cash rate by 40 basis points at tomorrow’s board meeting on the back of broadening inflation pressures.

In the Australian Economic Insight report senior economist Felicity Emmett said the first quarter Gross Domestic Product (GDP) report had prompted the ANZ to revise its prediction for tomorrow’s cash rate decision.

“The Q1 GDP report has prompted us to look for the RBA to lift the cash rate by 40 basis points at the June meeting – previously we expected 25 basis points,” she said.

“While GDP was in line with our expectations, today’s data confirmed the very strong average hourly wages growth that yesterday’s Business Indicators report implied. 

“Our estimate of 5.3 per cent year-on-year is well above our expectations from just a few weeks back, certainly much stronger than the signal from the Wage Price Index, and seemingly tracking above the RBA’s forecast.” 

Ms Emmett said the household consumption deflator, which is the broadest measure of consumer inflation, recorded the highest quarterly increase, 1.5 per cent, since 1990 (outside the GST). 

“This suggests to us that policy needs to lean more strongly against the broadening of inflation pressures,” she said.

“As such, we think the strength of the price and wage measures in the GDP data should be enough to convince Governor Lowe that ‘there is a very strong argument’ to deviate from a regular 25 basis point move and get the cash rate a little higher a little bit faster.”

Growth was also driven by government spending, up 2. 5 per cent, while business investment rose 1.4 per cent.

At the other end of the scale, residential construction fell one per cent, while net exports slashed 1.7ppt off growth.

“Household disposable income rose a modest 0.6 per cent quarter-on-quarter, with wages up a solid 1.8 per cent,” Ms Emmett said. 

“Small business profits (down 2.7 per) weighed on the result, as did strong gains in income tax ( up 6.1 per cent).”

Ms Emmett said while growth in consumer spending outpaced income growth, the household saving rate dropped from 13.4 per cent to 11.4 per cent.

“While this is well down from the peak of 24 per cent recorded in the June quarter last year, it’s still well above the 5 per cent levels seen in the pre-pandemic period,” she said.

“Very large household bank deposits built up over the past year or so leave consumers in a very good position to continue to grow spending strongly through 2022.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.