Australia’s central bank on Friday sharply revised up its outlook for inflation while projecting unemployment at 50-year lows, yet it was still content to keep policy super loose as it seeks a lasting recovery in wages and living standards.
Yet that stoic stance is becoming harder to sustain as its global peers turn more strident on inflation and financial markets howl for near-term rate hikes.
In its quarterly statement on monetary policy, the Reserve Bank of Australia (RBA) said that the firmer outlook for inflation meant its policy goals might be met sooner than previously thought, opening the door to an early tightening.
But the Board emphasised that wages growth still lagged and it would wait for a sustained pick-up to emerge.
“Progress towards the Bank’s goals has been material, but significant uncertainties surround the inflation outlook,” RBA governor Philip Lowe said, at the opening to the 69-page report.
“Consequently, the board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”
Policy-makers have been badly wrong-footed by core inflation, which sped to 2.6% in the December quarter, when the RBA had thought it would not reach 2.5% until the end of next year.
As a result, the RBA now sees core inflation peaking at 3.25% in the June quarter and only slowing to 2.75% by the middle of 2024.
Unemployment Levels Down
Unemployment also surprised by dropping to 4.2% last quarter and the RBA now sees it hitting 3.75% by the end of this year, lows not visited since the 1970s. Yet wage growth is still seen rising only gradually to 3% by the middle of next year.
Annual wage growth is currently running at just 2.2%, less than half the pace of that in the US and UK and a major reason the RBA believes it can wait before tightening.
Lowe this week conceded that rates could rise later this year if the economy continued to surprise on the upside, but argued there was no reason to rush after other central banks.
That position is looking ever lonelier given the Bank of England was so alarmed by inflation that it almost hiked rates by a full 50 basis points on Thursday.
Even the usually dovish European Central Bank (ECB) acknowledged that inflation risks were mounting and opened the door to a rate rise this year, stunning markets.
“The ECB is finally joining the large and growing club of central banks who are now focused on taming inflation rather than supporting near-term demand,” ANZ’s head of Australian economics David Plank said.
“Pandemic levels of accommodation are now completely inappropriate as economies have recovered their Covid-related GDP losses and labour markets are booming.”
The shift sent bond yields surging across Europe and only reinforced investor wagers that the RBA would have to follow.
Futures are almost fully priced for a hike to 0.25% by June and for rates to reach 1.0% by year end. Among the local banks, CBA and Westpac are tipping an August move, ANZ is in for September and NAB for November.
- Reuters with additional editing by Sean O’Meara
ALSO READ:
Australia Central Bank Asks for Patience Over Rates in 2022
Australian Core Inflation Near 8-Year Peak in Major Shock
Australia’s Wealth Fund Reduces its Exposure to Equities
