Australia Rate Hikes in 2022 Are a Real Possibility, Auld Says

(Bloomberg) -- Australia's unemployment rate is likely to fall to the “low fours” next year, sparking an eagerly-awaited increase in wages growth and creating conditions for interest-rate liftoff, said Sally Auld, chief investment officer at JBWere Ltd.

“To get a rate hike by the end of the year, you need all the numbers to print in the right zone both on wages and on core inflation. And that's a possibility, absolutely,” Auld, who advises clients at National Australia Bank Ltd.'s private wealth arm, said in an interview. “I think it'll be the fourth quarter of next year or first quarter 2023.”

That underlines the growing disconnect between investors and the Reserve Bank of Australia's expectation that rates will remain at a record low 0.1% until 2024. Volatility is also surging in Aussie bond futures, emphasizing the extreme skepticism among traders that the RBA will hold for at least two more years.

Australia Shorter Bonds to Shine on RBA Dovishness, Auld Says

While the RBA is upbeat about growth prospects for the A$2.1 trillion ($1.5 trillion) economy, Governor Philip Lowe remains decidedly dovish on the timeline for wages growth to build and inflation return to the bank's target. 

Markets are much more optimistic, fully pricing in an initial 15 basis-point hike in May that would take the cash rate to 0.25% and two quarter-point increases -- with the possibility of a third -- over the remainder of 2022.

Either case could be derailed by a renewed outbreak of the virus, particularly against the backdrop of the new omicron variant. Australia's east coast has only just emerged from a protracted lockdown that drove the economy into its third-biggest contraction on record and sent unemployment to a six-month high of 5.2%. 

These uncertainties and subdued price pressures have prompted Lowe to repeatedly push back against aggressive market pricing, saying he would want to see actual inflation, not forecast, return “sustainably” to around the midpoint of the RBA's 2-3% target band.

That suggests the governor is unlikely to move based on just one quarter of strong CPI data, Auld said, adding to the risk the RBA could be “almost a touch too late in terms of when the optimal time might be to start hiking rates.” 

As a result, the central bank could find itself forced to go hard and fast to cool an overheating economy. “The later you start the tightening cycle the more quickly you'll probably have to move because you're going to have to play some catch up, by definition,” Auld added. 

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