CBA predicts first interest rate hike to be as early as June 2022

Australia's biggest bank has radically shifted forward its forecast for the nation's central bank to raise interest rates as early as June.

In a research note, Commonwealth Bank's Head of Australian Economics Gareth Aird said the bank had shifted its "central scenario" for a cash rate target increase to June this year from August.

It did this following a statement from Reserve Bank of Australia (RBA) Governor Philip Lowe, in which he said the bank was looking for "another couple of CPIs" – or consumer price index – before making a decision.

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"We interpret this statement to mean that the RBA will conclude that inflation is 'sustainably within the target range' if the next two inflation prints are inline with their forecasts," Mr Aird wrote.

"Based on the Governor's comments last week we believe the RBA's central scenario and reaction function is consistent with a first increase in the cash rate in August 2022.

"But the RBA's forecast for inflation is different to ours."

Mr Aird said the Commonwealth Bank team was "very comfortable" with its expectation that underlying inflation will be stronger than the RBA's forecast, forcing it to increase rates earlier than expected.

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The research note admits picking the "exact timing" of rate hikes is "false precision", but the bank had laid out an approximate forecast for when rates will rise and by how much.

Currently, CBA expects the RBA to lift rates by 15 basis points in June, taking the official cash rate to 0.25 per cent.

It will then lift rates by 25 basis points twice in the third quarter of 2022, and once more in the fourth quarter, taking the cash rate to a flat 1.0 per cent by the end of this year.

Finally, in the first quarter of 2023, the bank predicts one more rise to take the cash rate to 1.25 per cent.

"We expect the RBA to stop their tightening cycle in early 2023 when the cash rate hits 1.25 per cent," Mr Aird writes.

"At that point the annual rate of wages growth should be comfortably above 3 per cent.

"But this does not mean that the RBA will continue to raise rates.

"Indeed we believe they will not need to."

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Of particular concern to the RBA is the number of Australians on fixed-rate home loans that are due to expire throughout 2023, meaning rate hikes will likely be slow and measured.

"The RBA will need to assess the impact of rate hikes on the economy, particular the household sector and the housing market, as they move through the tightening cycle," Mr Aird writes.

"This means the central bank is likely to be patient and a gradual and shallow rate hike trajectory is our base case."

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