Westpac is forecasting a significant upswing in demands for high wages in the coming year.
It says this will help push the Official Cash Rate to 3% as the Reserve Bank tries to hold inflation in check.
These are included in the forecasts for the coming year from Westpac's acting chief economist Michael Gordon.
He says the labour market is very tight and a slight uptick in wages in recent months is no more than a catchup after little or no pay increases during the Covid shock.
“The demands for cost-of living adjustments are only just beginning,” he writes.
“And once they take hold, there’s a growing risk of an upward spiral in wages and prices, which could prove difficult for the Reserve Bank to dislodge.”
On the housing market, Westpac expects house price growth to slow substantially in the coming months, but start to slip back towards the end of the year.
“Higher mortgage rates won’t be a strain for the majority of property owners, but they will significantly change the arithmetic for new purchases,” Gordon says.
Inflation has surged to 4.9% by the September quarter, and most economists expect it to go higher. Westpac says there was some debate about how long lasting this would be.
“We've maintained that demand is the greater determinant of inflation ….. which came through with a vengeance towards the end of the year, even with lower population growth and the absence of international tourists.
“We now recognise that the monetary stimulus put in place in response to Covid will need to be withdrawn – and beyond to the point where monetary policy is outright tight.”
But the bank qualifies this by saying the 3% cash rate expected by 2023 will probably not be permanent, but will represent a temporary peak in the cycle, in order to cool demand back down to a more sustainable level.