Australia Signals Hawkish Tack on Rates Amid Price Pressures

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Australia's central bank opened the door to earlier interest-rate increases by scrapping a reference to remaining “patient” on policy and signaling that the timing of liftoff would depend on forthcoming data.

The Reserve Bank left its cash rate at a record low 0.1% -- as expected -- on Tuesday. The hawkish tilt in its post-meeting statement sent the Australian dollar surging through 76 U.S. cents for the first time since June 2021, while yields on the three-year bond reversed earlier declines to post gains.

Governor Philip Lowe's pivot from a prolonged dovish stance reflects an economy approaching full employment and signs that inflation pressures are strengthening. He signaled inflation data out later this month and wages in May will be key readings, suggesting the RBA's June meeting is now in play, as money markets and some economists have suggested.

In his statement, Lowe expressed increasing confidence that the pay gains he's been seeking to ensure inflation remains sustainably inside the RBA's 2-3% target were “in prospect.” Australian unemployment is at a 13-year low of 4% and is predicted to fall further.

Cracks Emerge in Australian Economy Approaching Maximum Velocity

The board will assess upcoming inflation and wages trends as it “sets policy to support full employment in Australia and inflation outcomes consistent with the target,” the governor said.

Consumer prices worldwide are surging as commodity costs soar, fueled by Russia's war on Ukraine and virus lockdowns in China that are disrupting supply chains. Australia's first-quarter CPI report is due on April 27 and the wage price index will be published on May 18.

“The RBA has begun its gradual pivot to signal the cash rate will start to rise,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia. “Our base case remains the first rate hike in June. There does, however, remain some risk of an earlier rate hike in May.”

Economists, generally, have had a lower level of conviction on a May move because an election is due to be held then and the central bank is likely to want to avoid being drawn into the political campaign.

Australia had been a laggard in the global shift to tightening that's seen the Federal Reserve raise already, with speculation mounting that it could opt for a half-point hike next to try to temper inflation. Across the Tasman Sea, New Zealand has raised three times, as has South Korea's central bank.

Lowe has long cited weak wages growth to justify his ultra-loose monetary settings, saying pay gains need to be stronger to prevent inflation weakening once temporary drivers like energy costs subside.

What Bloomberg Economics Says...
“We view the RBA's pivot from patience as a signal it's getting ready to hike rates once additional inflation and wages data -- particularly the minimum wage decision -- arrive. We retain our forecast for an August hike.”
--James McIntyre, economist
For full report, click here

However, recent data suggest Australia's A$2.2 trillion ($1.7 trillion) economy is beginning to run hot: Job vacancies are at a record, consumer spending is strong and a private measure of inflation released Monday jumped to a 13-year high of 4%.

The median estimate of economists is for a rate increase in July with the cash rate at 0.75% at the end of the year. Traders are more aggressive, betting on the cash rate climbing to 2.5% in a year's time and 3.5% in two years.

“The retirement of the ‘patience' mantra is an acknowledgment that like the rest of the developed country complex, inflation in Australia has and will surprise with its magnitude and momentum,” said Stephen Miller, an investment strategist at GSFM. “Meetings from hereon in are now live.”