Interest rates could peak at 4.1% amid sinking consumer confidence in Australia, says NAB

Major bank believes business conditions and confidence are improving as it sets cash rate prediction higher than other banks

One of Australia’s largest banks has lifted its forecast for the peak cash rate to 4.1%, as new figures show consumer confidence is sinking and small businesses are struggling with rising costs, even as larger firms report a positive start to 2023.

Westpac and the Melbourne Institute’s latest monthly survey showed confidence dropping by 6.9% in February to 78.5 points. Excluding a low of 78 in November, you would need to go back to the depths of the pandemic or all the way back to the 1990s recession to find a lower reading, St George Bank said.

The Westpac/Melbourne Institute's consumer gauge points to some dimming of sentiment as the RBA lifts its cash rate.

— (@p_hannam) February 14, 2023

By contrast, NAB’s monthly business conditions gauge for January revealed an improvement in both conditions and confidence. The evidence of the upturn helped prompt the bank to lift its prediction for the peak Reserve Bank cash rate to 4.1%, equivalent to three more 25-basis-point hikes.

“Since we upped our call to 3.6% last October, the economy has remained resilient to both higher inflation and interest rates,” NAB economists said. “Our business survey [out on Tuesday] and consumer transaction data [out on Wednesday] indicate this resilience continued in January, and we continue to expect strong prints for wages and inflation to continue in the near term.”

If NAB's forecast that the RBA will lift its cash rate another 75 basis points to 4.1%, repayments will lift by almost half, compared to the pre-May 2022 levels. (Source: @RateCity )

— (@p_hannam) February 14, 2023

At 4.1%, NAB’s call is at the top of predictions among the major commercial banks. For now, Westpac, ANZ and CBA are forecasting the RBA’s rate will rise to 3.85% before retreating. The central bank warned last week it “expects to increase interest rates further over the period ahead”, surprising most commentators.

Not so gloomy on the business front, NAB says. Its monthly survey suggests conditions were "very high" and confidence now back to "average" levels. Those readings were despite by then eight RBA rate rises to digest.

— (@p_hannam) February 14, 2023

The RBA governor, Philip Lowe, will detail the bank’s views to Senate estimates for 90 minutes on Wednesday and is scheduled to front a House of Representatives committee on Friday.

Belinda Allen, a senior CBA economist, said the contradictory signals reflect the timing of the surveys. The business gauge was compiled prior to last Tuesday’s RBA rate hike while consumers were queried both before and after the increase, with sentiment dimming in the latter part.

“The fall was no surprise given the hawkish hike by the RBA in February and talk of further rate hikes to come,” Allen said, noting confidence was running at a steady 83.5 points prior to rate increases and 74.8 afterwards.

“Consumers appear to have received the message [that] interest rates will move higher,” she said. A gauge of “family finances” sagged to just 62.1 points to plumb levels not seen since the early 90s recession.

A split may also be emerging within the business sector, with the more positive readings picked up in the NAB survey not being reflected by small companies.

According to NAB, the advance in business conditions last month to a “very high” reading of +18 points was broad-based across industries and the nation.

“There were strong increases in conditions for ‘upstream’ sectors such as wholesale, construction and manufacturing, and importantly, conditions in the more consumer-facing industries remained very strong,” Alan Oster, NAB’s chief economist, said.

Business confidence also perked up to a +6 reading after two months of negative readings, suggesting “firms have a more optimistic outlook as concerns about global growth prospects ease, while strong conditions are also providing evidence that the economy is more resilient than previously expected”.

Cost pressures, meanwhile, were lately trending higher. Labour costs, for instance, rose by 2.7%, up from 2.1% in the previous quarter, while purchase prices jumped by 3.2% from 2.6%.

Matthew Addison, the chair of the Council of Small Business Organisations Australia, said people only needed to walk through CBDs of major cities to see the “stunning” number of empty shops.

“Small business are telling us they are doing it very, very tough,” Addison said, referring to a member base that counts about half of the country’s 2.5m small and family firms.

Revenue increases were largely because of inflation for many companies. “[W]hat is really hitting them is their whole cost structure has increased, so the margin is next to zero,” he said.

Employers were forking out sign-up bonuses of as much as 20% or increasing pay by a similar amount to attract or retain staff, Addison said. Worker shortages were particularly severe in industries such as hairdressing, with salons being shut for days at a time.

“It is a time of very careful management and analysis of how you’re doing business,” Addison said. With more RBA rate rises to come, 2024 “is not going to be one of instant relief”.


Peter Hannam

The GuardianTramp

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