ANZ Bank tips two RBA interest rate hikes in 2018

ANZ Bank predicts the Reserve Bank will raise official interest rates by 0.5 percentage points next year as the economy gradually improves, with the first hike tipped for May.

Australia's cash rate has been at a record low of 1.5 per cent since last August, but ANZ economists David Plank and Felicity Emmett argue the data suggests "downside risks" to the economy have eased, removing the need for ultra-low rates.

The economists said that if the cash rate stayed at its current low, "real" or inflation-adjusted interest rates would be negative, which was "increasingly unnecessary" in an improving economy.

Even so, they predicted the RBA would tread cautiously.

They forecast the cash rate will be lifted by 0.25 percentage points in May, followed by another hike of the same size in the second half of the year, and it will then be left unchanged over 2019 so as not to crunch spending of highly-indebted households. Previously, ANZ was not forecasting any rate hikes for next year.

"The change to our view on the RBA reflects an outlook for growth that is a touch more positive than previously and an easing to the downside risks to both growth and inflation," the economists said.

Commonwealth Bank senior economist Michael Workman also noted that financial markets have recently put growing bets that rate hikes will occur in mid 2018, rather than in mid 2019 as previously thought.

Mr Workman said CBA did not expect an RBA rate rise until late next year, "but the risk of an earlier move is building," and a speech from RBA governor Philip Lowe on Thursday could provide further detail on the central bank's thinking.

In the past, cycles of interest rate rises have involved bigger increases than 0.5 percentage points, but ANZ argued this would be an "unusual" cycle because of households' high debts.

By their calculations, two standard 0.25 percentage point rate hikes would lift the average mortgage repayment on a median house towards previous peaks, assuming a loan size of 80 per cent of the property's value.

"Even if the RBA does enter into the cycle with the expectation that it will tighten by more than 50 basis points, we think the reaction of households to the move will quickly persuade the Bank that this will be enough for now."

The RBA has not increased official interest rates since 2010, but Dr Lowe has made it clear the next move is far more likely to be an increase than another cut.

National Australia Bank economists also argued last week the RBA would remove "emergency accommodation" in 2018, predicting 0.25 percentage point interest rates hikes in August and November next year.

NAB also argued the RBA would follow up these two rate hikes in 2018 with another 0.5 percentage point lift in 2019, depending on the strength of economic data.

"While we remain cautious about aspects of the economic outlook, we now believe the labour market will strengthen enough to allow the RBA to remove some of the emergency stimulus currently in place," NAB economists led by Alan Oster said last week..

In contrast, Westpac's chief economist Bill Evans expects there will be no change in interest rates in 2018, because of the persistent weakness in household income growth.

Westpac on Wednesday released its leading index, which is intended to show future momentum in the economy, and Mr Evans said it supported the bank's view that growth would be 2.5 per cent, below its long-term average. Mr Evans said that as house market appeared to be slowing, an increase in interest rates next year "seems unnecessary."