Australia’s top central banker on Wednesday for the first time opened the door to a possible rise in interest rates later this year, but argued there was a rare opportunity to reach full employment that justified being patient.
Offering an upbeat economic outlook, Reserve Bank of Australia (RBA) governor Philip Lowe repeatedly emphasised that the country was near getting unemployment under 4% for the first time in half a century and driving wages higher after years of subpar growth.
“We have a unique opportunity here to get people into jobs and get their incomes growing more quickly, and we can do that without running an unacceptable risk on inflation,” Lowe said.
“The (RBA) board has made the judgment that is an appropriate trade-off.”
The RBA expects unemployment to fall to 3.75% later this year, from the present 4.2%, and stay there next year. Wage growth is seen rising to 2.75% this year and to reach 3% over 2023, a level policymakers have long desired.
“If things go well, and the economy performs strongly…then there are clearly scenarios where we would be increasing rates later this year,” he added.
That was a shift in stance given Lowe had long insisted the 0.1% cash rate would likely not rise until 2023 at the earliest.
Lowe also noted that it was plausible a rate rise might be a year or more away, and the bank would carefully be watching data on inflation, wages and consumption over the year ahead.
Inflation on Central Bank’s Radar
Financial markets are wagering a move will have to come much sooner given core inflation jumped to 2.6% last quarter, a level the RBA had not expected to see until late next year.
Yet Lowe said it was too early to conclude that inflation would remain in the bank’s 2-3% target band and much depended on whether global supply bottlenecks persisted or not.
Investors responded to his dovish view by scaling back wagers on a near-term rate rise, with a move to 0.25% in May now seen as a 50-50 chance instead of a done deal.
The futures market still implies rates could reach 1.25% by year end, the same pricing as for US rates. Lowe said he “struggled” to understand such aggressive wagers given Australian inflation was half of that in the US.
Economists at the major Australian banks all expect rates to rise in the second half of the year with Westpac and CBA tipping August; ANZ going for September and NAB for November. None see rates anywhere near 1.25% by year end.
“Throughout the pandemic the RBA has sounded as dovish as is credibly possible on the inflation outlook and the outlook for the cash rate at every given chance,” said Gareth Aird, head of Australian economics at Commonwealth Bank. “Today was no different.”
“Nonetheless we expect inflation, wages and labour market data will be sufficiently strong over coming quarters for the RBA to hike the cash rate in August.”
- Reuters with additional editing by Sean O’Meara