Australian Banks Predict Peak Cash Rate to 4.1% Amidst Sinking Consumer Confidence and Rising Business Costs

Strategic Insights -

As one of Australia's largest banks, Westpac, has lifted its forecast for the peak cash rate to 4.1%, new figures show consumer confidence sinking and small businesses struggling with rising costs. Despite this, larger firms report a positive start to 2023, with NAB's monthly business conditions gauge for January revealing an improvement in both conditions and confidence.

Key Takeaways:

  • The Westpac/Melbourne Institute's consumer gauge points to a dimming of sentiment as the RBA lifts its cash rate, with confidence dropping by 6.9% in February to 78.5 points, the lowest reading since the pandemic or the 1990s recession.
  • NAB's monthly business conditions gauge for January revealed an improvement in both conditions and confidence, with a "very high" reading of +18 points, suggesting firms have a more optimistic outlook as concerns about global growth prospects ease.
  • The business confidence reading perked up to a +6 reading after two months of negative readings, indicating strong conditions are also providing evidence that the economy is more resilient than previously expected.
  • However, cost pressures are trending higher, with labour costs rising by 2.7% and purchase prices jumping by 3.2%.
  • Small businesses are facing significant challenges, with revenue increases largely due to inflation and margins next to zero, forcing employers to offer sign-up bonuses of up to 20% or increase pay by a similar amount to attract or retain staff.
  • Worker shortages are severe in industries such as hairdressing, with salons being shut for days at a time.
  • NAB has predicted the Reserve Bank will lift interest rates to 4.1%, at the top of predictions among the major commercial banks, while Westpac, ANZ, and CBA forecast the RBA's rate to rise to 3.85% before retreating.

Statistics:

  • Consumer confidence dropped by 6.9% in February to 78.5 points, the lowest reading since the pandemic or the 1990s recession.
  • NAB's business conditions gauge improved in January to a "very high" reading of +18 points.
  • Labour costs rose by 2.7% in the latest quarter, up from 2.1% in the previous quarter.
  • Purchase prices jumped by 3.2% from 2.6% in the previous quarter.
  • Over half of Australia's 2.5m small and family firms are facing severe challenges, with revenue increases largely due to inflation.

Sources:

  • Westpac/Melbourne Institute consumer gauge, February 2023
  • NAB monthly business conditions gauge, January 2023
  • Reserve Bank of Australia, February 2023
  • St George Bank, February 2023
  • Council of Small Business Organisations Australia, February 2023
  • CBA economists, February 2023
  • NAB economists, February 2023