Summary from a much longer piece, the main points.
- Now that it is generally accepted that the RBA tightening cycle will begin in June, with a series of consecutive hikes, interest is firmly targeted at the likely peak in rates in the cycle. The steady 4% unemployment rate that has just been reported for March will take some pressure off the markets’ push for a hike in May.
- We revised our profile last week to bring forward the timing of the peak to June 2023 (from November) and lift it from 1.75% to 2.0%. That is a long way from the 3.4% currently priced into the market and the “theoretical” 3.5% associated with 1% real and 2.5% inflation that is often favoured by central banks.
- The lower nominal terminal rate which we, and others, favour relies upon the household sector being quite sensitive to rising rates due to their high levels of household debt. We estimate that a terminal rate of 2% would see that debt servicing ratio settle above the ratios of the two previous cycles. Note that the “cycle” in 2017/18 was not driven by a rising RBA cash rate rather the banks’ responses to macro prudential tightening policies.
