The Reserve Bank of Australia (RBA) kept its benchmark rate at 0.1% on Tuesday in a move that came as little surprise to investors. Governor Philip Lowe, however, cited the Ukrainian-Russian war as a “major new source of uncertainty”.
Lowe predicted that core inflation could hit 3.25% in the near future, above the RBA’s 2-3% target. Volatility in the global energy market and lingering supply-side issues, he says, add to the unpredictability of whether a pick-up in inflation will persist.
“At the same time,” he said, “wage growth remains modest and it will likely take some time before labor cost growth reaches a rate consistent with sustained low inflation. the goal”. He adds that the RBA “stands ready to be patient as it monitors developments in the various factors affecting inflation in Australia.”
Marcel Thieliant, senior economist for Japan, Australia and New Zealand at Capital Economics, has forecast a rate hike for June and expects inflation to top 4% this quarter and remain elevated in the second quarter. of this year.
What particularly matters is the adjusted average inflation outlook – removing extreme price swings at both ends while taking a reading of the remaining values – says Thieliant.
Housing Market Oscillation Risk
While the RBA acknowledges continued supply chain shocks “the war in Ukraine could exacerbate existing shortages by disrupting semiconductor supply as well as amplifying tensions in shipping,” Thieliant continues.
“Our forecast is that the Bank will raise its rates to 1.75% next year, which would be less than what the financial markets anticipate. However, there are some early signs that the housing market is beginning to falter in response to rising fixed mortgage rates.
“Once the Bank starts to rise, variable rates will also start to rise, which will put a serious strain on affordability. If the recent slowdown in house price growth already turns into a real downturn this year, the Bank is unlikely to raise rates as aggressively as we expect.
A word that came up constantly in the RBAs Declaration of March 1 was the word “sustainable”.
ING analysts Robert Carnell and Francesco Pesole said last week that inflation sustainability can be read in many ways, but persistent real inflation above the RBA’s target range for more than a quarter would “probably go a long way to ticking that box.”
More compelling reasons for the RBA to act, they say, “would be signs that wage growth was high enough to keep inflation buoyant, and for that to happen it has indicated that wage growth will need to reach 3% or more.
“The Wage price index in 4Q21 was released recently and increased, but only to 2.3% from 2.2% [over the year]. We won’t get any more data on this for another quarter.
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“We believe,” they continue, “there is a good chance that wage growth will pick up faster this year, although wage inflation may still be just below the 3% rate for 1Q22. , and we may have to wait until the Q2 figures are released for this condition to be met.
US Fed in the rear view mirror
Dr Lowe’s statement also mentioned “patience” and “various factors”, suggesting a watchful eye on the US Federal Reserve. The Fed is expected to hike US rates as much as 50 basis points this month, with more hikes to follow. For the RBA however, it’s very wait-and-see.
As for the bond market, yields have risen over the past month, Dr Lowe said, but the RBA would not want to see spreads on Australian government bonds widen over US Treasuries , emphasizes ING.
Financial conditions “are the sum of short and long rates and the competitiveness of the currency, so keeping policy rates low for longer than the market deems appropriate may not actually deliver the desired accommodative financial conditions.”
Russian currency fluctuations contained
The Australian dollar continued to rack up gains – despite strong demand for the US currency – earlier, a little below the 73 cent mark, but then drifted lower. The AUD seems reasonably protected from the ruble’s free fall.
Iron ore, one of Australia’s top exports, is seeing prices rise again on improving prospects from China, while other metals are rising. The official Purchasing Managers’ Index (PMI) for China’s manufacturing sector rose to 50.2 in February from 50.1 in January. A consensus had expected 49.8.
Atrocious weather conditions in Western Australia mean an increased risk of disruption to mining and transport, which is supporting prices on the supply side. By mid-morning, the AUD against the British pound jumped to 0.5426, near a high for the month.