The Reserve Bank of Australia (RBA) has kept the cash rate at a record low of 0.1 per cent since November 2020, but the board has now changed its tune in the face of rapidly escalating inflation and war in Eastern Europe.
At its April meeting, and for the first time in a long time, the board dropped its patience narrative and acknowledged the dangers of waiting too long to accelerate the rate cycle. And although it did not give a firm indication of when rates could head north, inflation figures on 27 April are expected to hold particular significance.
According to GSFM investment strategist Stephen Miller, the RBA May meeting must be considered “live”. Not only is he expecting inflation to blow the RBA’s February Quarterly Statement on Monetary Policy forecasts out of the water, he also believes wages may already be at a level satisfactory to the bank.
“Most of the economic commentariat have pencilled in June as the most likely point for a policy rate lift-off giving the RBA Board the benefit of viewing the March quarter Wage Price Index released on 18th May. However, there is evidence of rapid acceleration in wages already,” Mr Miller said.
According to the latest NAB business survey, labour costs increased 2.7 per cent on a quarterly basis in March, which was well above the previous 2 per cent record reached more than 15 years before.
“The RBA looks to be keenly aware of this,” Mr Miller said.
“This accounts for the appearance of optionality in RBA governor Philip Lowe’s April statement and the retirement of “patience,” he continued.
Will the RBA remain laggard?
Last Wednesday, New Zealand’s Reserve Bank (RBNZ) raised the official cash rate to 1.5 per cent in a bid to contain inflationary pressures.
The committee agreed it is appropriate to act quickly, confirming its policy path of “least regret” is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output, interest rates, and the exchange rate in the future.
In a similar vein, the Bank of Canada (BOC), lifted its key interest rate by the highest amount in more than 20 years and warned that more hikes are coming amid towering inflation forecasts.
And while RBNZ and BOC have been at the forefront of the retreat from the historically high levels of monetary accommodation applied by central banks in the wake of pandemic, the RBA has been among the most determinedly laggard.
According to Mr Miller, while this, to some extent, has been understandable, April’s inflation data may change everything.
New Zealand’s inflation currently sits at a headline rate of 5.9 per cent, while in Canada it has crept up to a 31-year high of 5.7 per cent. These figures are considerably higher than in Australia where inflation is ‘comfortably’ at 3.5 per cent.
However, NAB economists forecasted a core inflation at a whopping 1.2 per cent for the March quarter and 3.4 per cent over the year.
This means that, if realised, the six-month annualised rate of core inflation would be 4.4 per cent even before the full extent of the price pressures unleashed by the Russia-Ukraine conflict have been reflected.
